Let's look at an example—a private firm that is hired by local governments to clean up public parks. In the table below, there are three different possible combinations of labor and physical capital for cleaning up a single average-sized park. The first production technology is heavy on workers and light on machines; the next two technologies substitute machines for workers. Since all three of these production methods produce the same thing—one cleaned-up park—a profit-seeking firm will choose the production technology that is least expensive, given the prices of labor and machines.

 Production technology A uses the most labor and least machinery. Production technology C uses the least labor and the most machinery. The table below outlines three examples of how the total cost changes with each production technology as the cost of labor changes. Why do you think that as the cost of labor rises from example one to two to three, the firm will choose to substitute away from labor and use more machinery?

Example one shows the firm’s cost calculation when wages are $40 and machine costs are $80. In this case, technology A is the lowest-cost production technology. In example two, wages rise to $55, while the cost of machines does not change. In this case, technology B is the lowest-cost production technology. If wages keep rising up to $90—while the cost of machines remains unchanged—then technology C becomes the lowest-cost form of production, as shown in example three.

These examples show 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; as labor becomes relatively more expensive, profit-seeking firms will seek to substitute the use of other inputs.

When a multinational employer like Coca-Cola or McDonald’s sets up bottling plants or restaurants in high-wage economies like the United States, Canada, Japan, or Western Europe, it is likely to use production technologies that conserve the number of workers and focus more on machines. However, that same employer is likely to use production technologies with more workers and less machinery when producing in lower-wage countries like Mexico, China, or South Africa.

  

 Refer to the example above that discusses a hypothetical firm hired by the local government to clean up public parks for question 1 and 2.

1.If the cost of labor remains at $40, but the cost of a machine decreases to $50:

a)What would be the total cost of each method of production? Which method should the firm use, and why? (3 marks)

b) Create a new table showing the changes.(3 marks)

2. In the same example, suppose the cost of machines increases to $55, while the cost of labor stays at $40.

a) How would these changes affect the total cost of the three methods? (3 marks) b) Which method should the firm choose now? (1 mark)

c) Create a new table showing the changes. (3 marks)

3) A small company that shovels sidewalks and driveways has 100 homes signed up for its services this winter. It can use various combinations of capital and labor: lots of labor with hand shovels, less labor with snow blowers, and still less labor with a pickup truck that has a snowplow on front.

•Method 1: 50 units of labor, 10 units of capital

•Method 2: 20 units of labor, 40 units of capital

•Method 3: 10 units of labor, 70 units of capital

If hiring labor for the winter costs $100/unit and a unit of capital costs $400, a) what production method should be chosen? (2 marks)

b) What method should be chosen if the cost of labor rises to $200/unit? (2 marks)

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Three ways to clean a park Production technology A 10 workers 7 workers Production technology B Production technology C 3 workers 2 machines 4 machines 7 machines