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Homework answers / question archive / Kraft has a plant in the Alaska and Hawaii: The wage in Alaska is $5
Kraft has a plant in the Alaska and Hawaii:
The wage in Alaska is $5.
The wage in the Hawaii is $20.
Marginal product of the last worker in Alaska is 100
Marginal product of the last worker in the Hawaii. is 500
(Size of the plants or the amount of capital equipment is unchangeable).
a. Is the firm maximizing output relative to its labor cost? Details.
b. If it is not, what should the firm do?
Is the firm maximizing output relative to its labor cost? Details.
In Alaska, MP1/W1 = 100/5 = 20
In Hawaii, MP2/W2 = 500/20 = 25
Since MP1/W1 < MP2/W2, or the output produced by 1 extra dollar spent in A is lower than that in H, the firm is not maximizing the output.
b. If it is not, what should the firm do?
Since MP1/W1 < MP2/W2, the output produced by 1 extra dollar spent in A is lower than that in H, it is obviously more profitable to invest in Hawaii. Thus, the firm should hire more labours in H and less in A.
