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Homework answers / question archive / Diamond Brewery is re-evaluating its optimal combination of inputs (which are imperfect substitutes) as a result of recent union-negotiated wage increases
Diamond Brewery is re-evaluating its optimal combination of inputs (which are imperfect substitutes) as a result of recent union-negotiated wage increases. At the present time, the MP of labor on the production line is 10 cases of beer per hour and the price of a unit labor service (PL) is $10/hour. The MP of capital is 12 cases of beer per hour, and the
price of a unit of capital's service (PK) is $8/hour.
Diamond Brewery is optimal. Explain why or why not.
b) If the present input combination is not optimal, how can Diamond Brewery reduce cost of production for a given output or increase output with a given total cost? (Explain whether and why the company should use more capital and less labor, or less capital and more labor.)