posted by TrickyEcon on .
I am having problems figuring out how to set this problem up.
Gamma Corporation, one of the firms that retains you as a financial analyst, is considering buying out Beta Corporation, a small manufacturing firm that is now barely operating at a profit. You recommend the buyout because you believe that new management could substantially reduce production costs, and thereby increase profit to a quite attractive level. You collect the following product information in order to convince the CEO at Gamma Corporation that Beta is indeed operating inefficiently:
MP = 10 P = $20
MP = 15 P = $15
Explain how these data provide evidence of inefficiency. How could the new manager of beat Corporation improve efficiency?
Economic efficiency will occur when
(MPl/MPk) = (Pl/Pk).
The firm should use more capital k and less labor l
It seems you have answered your own question. Economic efficiency occurs when MPx/MPy = Px/Py. So, in your example, use more k and less l.
Repost if you are still confused.