Choice of Production Technology A firm can perform many tasks with a range of combinations of labor and physical capital. For example. a firm can have human beings answering phones and taking messages. or it can invest in an automated voicemail system. A firm can hire file clerks and secretaries to manage a system of paper folders and file cabinets, or it can invest in a computerized recordkeeping system that will require fewer employees. A rm can hire workers to push supplies around a factory on rolling carts. it can invest in motorized vehicles. or it can invest in robots that carry materials without a driver. Firms often face a choice between buying a many small machines. which need a worker to run each one. or buying one larger and more expensive machine. which requires only one or two workers to operate it. In short. physical capital and labor can often substitute for each other. Consider the example of local governments hiring a private firm to clean up public parks. Three different combinations of labor and physical capital for cleaning up a single average-sized park appear in Table 113. The first production technology is heavy on workers and light on machines. while the next two technologies substitute machines for workers. Since all three of these production methods produce the same thingone cleaned-up parka prot-seeking rm will choose the production technology that is least expensive. given the prices of labor and machines. Production technology 1 2 machines Production technology 2 4 machines Production technology 3 7' machines Table 113 Three Ways to Clean a Park Production technology 1 uses the most labor and least machinery, while production technology 3 uses the least labor and the most machinery. Table 114 outlines three examples of how the total cost will change with each production technology as the cost of labor changes. As the cost of labor rises from example A to B to C, the firm will choose to substitute away from labor and use more machinery. Example A: Workers cost $40, machines cost $30 Labor Cost Machine Cost Total Cost Cost of technology 1 10 x $40 = $400 2 x $30 = $130 $530 Cost of technology 2 T x $40 = $230 4 x $30 = $320 $300 Cost of technology 3 3 x $40 = $120 7 x $30 = $530 $330 Example 3: Workers cost 355, machines cost $30 Labor Cost Machine Cost Total Cost Cost of technology 1 10 x $55 = $550 2 x $30 = $130 $10 Cost of technology 2 T x $55 = $335 4 x $30 = $320 $7335 Cost of technology 3 3 x $55 = $135 7 x $30 = $530 3725 Table 7.14 Total Cost with Rising Labor Costs 1?:1 Chapter T | Production, Costs. and Industry Structure Example C: Workers cost $90, machines cost $30 Labor Cost Machine Cost Total Cost Cost of technology 3 3 x $55 = $165 7 x $30 = $550 $325 Table 114 Total Coat with Rising Labor Costs 1T4 Chapter 1' | Production, Costs, and Industry Structure Example C: Workers cost $90, machines cost $30 Cost oftechnologyl $1.050 Cost oftechnologyZ $350 Cost oftechnologyS $330 Table 114 Total Coat with Rising Labor Costs Example A shows the firm's cost calculation when wages are $40 and machines costs are $30. In this case. technology 1 is the low-cost production technology. In example B. wages rise to $55. while the cost of machines does not change. in which case technology 2 is the low-cost production technology. If wages keep rising up to $90. while the cost of machines remains unchanged, then technoloEE-iI 3 clearly becomes the low-cost form of production, as example (3 shows. This example shows that as an input becomes more expensive [in this case. the labor input], firms will attempt to conserve on using that input and will instead shift to other inputs that are relatively less expensive. This pattern helps to explain why the demand curve for labor (or any input] slopes down; that is, as labor becomes relatively more expensive. prot-seeking firms will seek to substitute the use of other inputs. When a multinational employer like Coca-Cola or McDonald's sets up a bottling plant or a restaurant in a high-wage economy like the United States, Canada, Japan, or Western Europe, it is likely to use production technologies that conserve on the number of workers and focuses more on machines. However, that same employer is likely to use production technologies with more workers and less machinery when producing in a lower-wage country like Mexico, China, or South Africa. 3. The WipeOut Ski Company manufactures skis for beginners. Fixed costs are $30. Fill in Table 7.16 for total cost, average variable cost, average total cost, and marginal cost. Variable Fixed Quantity Total Average Variable Average Total Marginal Cost Cost Cost Cost Cost Cost 0 0 $30 1 $10 $30 2 $25 $30 3 $45 $30 4 $70 $30 5 $100 $30 6 $135 $30 Table 7.161L Based on your answers to the WipeDut Ski Company in Exercise 13, now imagine a situation where the firm produces a quantity of 5 units that it sells for a price of $25 each. a. What will be the company's prots or losses? 1}. How can you tell at a glance whether the company is making or losing money at this price by looking at average cost? Is. At the given quantity and price. is the marginal unit produced adding to prots? 5. If two painters can paint EDI] square feet of wall in an hour, and three painters can paint 275 square feet, what is the marginal product of the third painter? 6. Return to the problem explained in Table 113 and Table 7.14. If the cost of labor remains at $40. but the cost of a machine decreases to $5121, what would be the total cost of each method of production? Which method should the firm use. and why? 1'. Suppose the cost of machines increases to $55. while the cost of labor stays at $413. How would that affect the total cost of the three methods? Which method should the rm choose now? 3. Automobile manufacturing is an indusz subject to signicant economies of scale. Suppose there are four domestic auto manufacturers. but the demand for domestic autos is no more than 2.5 times the quantity produced at the bottom of the long-run average cost curve. What do you expect will happen to the domestic auto industryr in the long run