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Problem 30 Essay

The Production Analysis Team reviewed how to staff a new 80 guest product line with limited capital capabilities. They recommend staffing it with 2 skilled workers and 10 unskilled workers. Their calculations show that to minimize costs given wage rates, the optimal ratio of unskilled to skilled labor is 5:1. Plugging this ratio into the production function and solving for output of 80 yields a recommendation of 2 skilled workers and 10 unskilled workers.

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Monica J Kaul
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22 views2 pages

Problem 30 Essay

The Production Analysis Team reviewed how to staff a new 80 guest product line with limited capital capabilities. They recommend staffing it with 2 skilled workers and 10 unskilled workers. Their calculations show that to minimize costs given wage rates, the optimal ratio of unskilled to skilled labor is 5:1. Plugging this ratio into the production function and solving for output of 80 yields a recommendation of 2 skilled workers and 10 unskilled workers.

Uploaded by

Monica J Kaul
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Indiana Memorial union

M E M O R A N D U M
To: Production department
From: Production Analysis Team
Date:
Re: Production Review
You asked us to see give recommendation on how to staff the new 80 guest product line
. We have reviewed this and propose that considering we do not have the capabilities to
extend capital at this point of time , most cost effective way of staffing this would be to
have 2 skilled workers and 10 unskilled workers
WORKOUT:
Based on the production function Q= 1/15 (U^2)(S^2)(D^.5) from your memo, we can
differentiate to obtain dQ/dLu ( unskilled ) and dQ/dLs ( skilled ). Also we have D =
constant ie D =9. We can simplify the equation to
Q = 1/15 (U^2)(S^2)(9^.5) = 1/5 (U^2)(S^2)
MPLu ( unskilled ) = 1/5 (2)(U)(S^2)
MPLs (skilled ) = 1/5 (2)(S)(U^2)
To minimize cost given the skilled and unskilled wages and rental rate, the marginal
product per dollar spent on skilled labor must be equal to the marginal product per dollar
spent on unskilled labor. That means that at the ideal input mix,
MPLu / Wu = MPLs / Ws
Wu = $7
Ws = $35
so solving this
MPLu /7 = MPLs/35
We get U = 5S
That solves to unskilled labor to skilled labor ratio as 5:1

Now solving for Q = 80 and substituting in the equation


We have
Q = 1/5 (U^2)(S^2) =80
Or (U*S)^2 = 400
U*S = 20
Substituting U = 5S
5S^2 = 20
S^2 = 4
S = 2 and U = 10

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