Case Study and the question is :

Why did Giorcelli compare participating firms with the performance of firms that applied to the program but were excluded for budget reasons? Why is this better than just comparing the participants with firms overall?

182 PARTH The Market Spacene Choices Made by Households and Firms ECONOMICS IN PRACTICE Gains from Modern Management In this chapter we have looked at the way in which labor, capital, and other inputs are used to produce output of vari- ous sorts, We have described a somewhat abstract produc- tion function, treating labor and capital as homogeneous, In practice, of course, workers differ and all machines are not the same! Recent work by Michela Glorcelli from UCLA spot- lights the importance of worker training and modern ma- chinery In increasing output.! In the period after World War II, the United States in- troduced the Marshall Plan, an economic and financial aid program designed to help in the recovery of war-damaged Europe. Part of the Marshall Plan was a program aimed at improving the productivity of small and medium sized firms in Europe, many of which lacked modern management prac- tices and up-to-date machinery. The United States Technical `especially the managerial training part of the program, gen- Assistance and Productivity Program operated from 1952 crated large and long lasting positive effects, Productivity of to 1958, bringing managers of small European firms to the the participating firms grew by 15 percent in the first year United States for management training. Production planning. and continued to grow for more than a decade afterward. order management, and marketing were all part of the train- Glorcell's results suggest that the skills you learn in econom- ing. Firms were also given an opportunity to buy modern Ies and management have big pay offat American machinery at subsidized rates. The expectation was that this training and modern machinery would allow firms to increase outputs and revenues. CRITICAL THINKING How did the program work? Glorcelli focused on Italy, 1. Why did Giorcelli compare participating firms with where she collected data on the performance of more than 3,000 firms whose managers took part in this program. By the performance of firms that applied to the program but we're excluded for budget reasons? Why is this bet. comparing their performance with that of similar firms that ter than just comparing the participants with firms applied, but failed to be admitted to the program by virtue of last minute program budget cuts, she was able to estimate the overall? "Nichols Cionell, "The Long To Elia of Management and Technoing size of the effect. Overall, Glorcelli found that the program. Trendon* Ammon Tomany More, forthinning 73 LEARNING OBJECTIVE Choice of Technology Discuss the factors that firms consider when choosing As our sandwich shop example shows, inputs (factors of production) are complementary. among production techniques. Capital enhances the productivity of labor. Workers in the sandwich shop are more productive when they are not crowded at a single grill. Similarly. labor enhances the productivity of capital. When more workers are hired at a plant that is operating at 50 percent of capacity, previously idle machines suddenly become productive. However, inputs can also be substituted for one another. If labor becomes expensive. firms can adopt labor-saving technologies that is, they can substitute capital for labor. Assembly lines can be automated by replacing human beings with machines, and capital can be substituted for land when land is scarce. If capital becomes relatively expensive, firms can substitute labor for capital. In short. most goods and services can be produced in a number of ways through the use of alternative technologies. One of the key decisions that all firms must make is which technology to use. Consider the choices available to the diaper manufacturer in Table 7.1. Five different tech- niques of producing 100 diapers are available. Technology A is the most labor intensive, requir- Ing 10 hours of labor and 2 units of capital to produce 100 diapers. (You can think of units of capital as machine hours.) Technology E is the most capital-intensive, requiring only 2 hours of labor but 10 hours of machine time. To choose a production technique, the firm must look to toput markets to learn the current market prices of labor and capital. What is the wage rate (P J. and what is the cost per hour of