The Largo Publishing House uses 400 printers and 200 printing presses tp produce books. A printer's wage rate is $20, and the price of a printing press is $5,000. The last printer added 20 books to total output, while the last press added 1,000 books to total output. Is the publishing house making the optimal input choice? Why or why not? If not, how should the manager of Largo Publishing House adjust input usage?
Printer= 8,400 Press=6,000
To determine if the Largo Publishing House is making the optimal input choice, we need to compare the marginal product of each input to its cost.
The marginal product of an input is the additional output that is generated when one unit of that input is added, keeping all other inputs constant. In this case, we have two inputs: printers and printing presses.
The marginal product of the last printer is 20 books, meaning that when the last printer is added, the total output increases by 20 books. The wage rate for a printer is $20, so the cost of adding the last printer is $20.
The marginal product of the last printing press is 1,000 books, meaning that when the last printing press is added, the total output increases by 1,000 books. The price of a printing press is $5,000.
Now, we calculate the marginal product per dollar spent on each input:
- Marginal product per dollar for printers: 20 books / $20 = 1 book per dollar.
- Marginal product per dollar for printing presses: 1,000 books / $5,000 = 0.2 books per dollar.
Based on these calculations, we can see that the marginal product per dollar for printers is higher than that for printing presses. This indicates that the publishing house is not making the optimal input choice.
To adjust input usage, the manager of Largo Publishing House should reduce the quantity of printing presses and increase the quantity of printers. By doing so, they can increase the marginal product per dollar spent and achieve a more optimal input combination.