The Largo Publishing House uses 400 printers (workers) and 200 printing presses to produce books. A printer's wage rate is $20 per hour and the price per hour of a printing press is $5,000. The last printer hired added 20 books (per hour) to total output, while the last printing press added 1000 books (per hour) to total output. Is the publishing house making the optimal input choice? If not, how should the manager of Largo Publishing House adjust input usage?
Answer
A. No, the publisher is not making the optimal input choice. The publisher should use less of both inputs because the MP of each one is declining.
B. No, the publisher is not making the optimal input choice. The publisher should use more of both inputs in order to benefit from economies of scale.
C. No, the publisher is not making the optimal input choice. The publisher should use more printing press hours and fewer printer hours to produce at the same rate of output.
D. Yes, the publisher is making the optimal input choice.
E. No, the publisher is not making the optimal input choice. The publisher should use more labor hours and fewer printing press hours to produce at the same rate of output.
examine the benefits/cost ratio.
the last printer added: 20books/$20=1book/dollar
last press added: 1000books/$5000=0.20 books/dollar
Looks like the printer gets the most books per dollar invested.
check those figures.
Okay, but which one do you think would be the answer between the multiple choices given.
Ok, given the above, do this thinking exercise. If the publishing house had 5000 dollars, which would be the best expenditure: one Press, or 250 printer hours? Which makes the more books?
D. Yes, the publisher is making the optimal input choice.
To determine whether the publishing house is making the optimal input choice, we need to evaluate the marginal product (MP) of each input. The MP of an input measures the additional output that is generated by adding one more unit of that input while holding other inputs constant.
In this case, the last printer hired added 20 books per hour to total output, while the last printing press added 1000 books per hour to total output.
To find the MP of each input, we calculate the change in output divided by the change in the quantity of input. For the printer, the MP is 20 books per hour, and for the printing press, the MP is 1000 books per hour.
Since the MP of each input is declining, this means that the additional output gained by adding one more unit of each input is decreasing. Therefore, the publisher is not making the optimal input choice.
Among the answer choices, option C states that the publisher should use more printing press hours and fewer printer hours to produce at the same rate of output. This is the correct answer because it suggests a reallocation of inputs to achieve a more optimal balance. By using more printing press hours, which have a higher MP, and fewer printer hours, the publishing house can increase the total output and improve efficiency.
Therefore, the correct answer is option C.