Production and Market Competition Microeconomics Module 3 Essay

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Production and Market Competition

Microeconomics Module 3 - Case Production, Costs, Profits Cost Profit in assignment, review reference material: Rittenberg Libby T. Tregarthen. (2009). Chapter 8: Production Costs. Sections 1-4 Principles Microeconomics.

Choice of factors of production

A firm's choice of factors of production to change will be determined by likely outcomes of the change. In the short run, a firm can only increase its variable cost. The required consideration in this case is marginal return. The needs to assess whether increasing a variable cost leads to; increasing marginal returns, diminishing marginal returns or negative marginal return. In the long run, a firm's production factors can all be changed. The firm will need to consider the marginal benefits and loses from capital or labor increments.

The considerations that the restaurant manager need to have is the likely change on its cost function. The manager should also be guided by the likely change in the marginal returns likely to be realized from a unit increase in labor. For the restaurant business considering adding a new grill and French fry machine would be advisable if there is spare capacity in the labor force and, the addition to this machinery will yield to increasing marginal returns. On the contrary, adding new machinery only where there is no spare labor force will yield underutilized capacity. This results to the firm having a higher average cost than marginal revenue.

Hiring too much labor with no increases in capital will in the short run increase a firm marginal benefit up to the point where the is no spare capacity to be utilized by added labor force. Should the restaurant employee to much labor force it will initially experience increasing marginal utility. This is the case where a unit increase in labor yields more than a unit increase in output.

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Additional increases to output will yield diminishing marginal returns. In this case, unit increase in labor yields less than a Further increase in labor will result in negative marginal returns. This implies that a unit increase in labor adds no unit to output. The last scenario is the case of hiring to much labor. The restaurant employees will have no spare capacity to work with and will just be increasing the cost to the firm.

2. Marginal Decision Rule

Profit oriented firms will only operate where their marginal benefits are equal or greater than the marginal cost. This preference attained made by making an informed decision in the long run about the contributions of the factors of production. A firm with flexibility in choice of factors of production will choose factors of production that yield a lower marginal cost and higher marginal revenue.

In a case, where a firm has the option of choosing to have a labor intensive production line, the marginal benefit of an additional dollar spent on labor should yield a higher marginal product than the price of labor. For maquiladoras the cost of labor is relatively cheaper compared to capital. The preferences for labor intensive operations that maximize the available technological changes yields to more that proportionate change in revenue gained. This is the reason why firms have sought to relocate operations closer to where labor is considered cheep.

The U.S. economy benefits greatly from the infrastructural developments brought about by industrial location in the area. The location of an industry within the U.S. Border acts as a substantial source of revenue to the economy of U.S. The firms located in the area contribute to government revenues through Fees, tax on profits, foreign earnings and tax on incomes….....

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