Q1: CH 8 (10%)
At a management luncheon, two managers were overheard arguing about the following statement: “A manager should never hire another worker if the new person causes diminishing returns.” Is this statement correct? If so, why? If not, explain why not.

The manager quoted in the passage above is incorrect. If the new worker causes diminishing returns, it means that she produces less than the worker hired before her. Let’s say that a restaurant hires workers at the rate of $80 per day. A chef, on average, can prepare 60 meals per day. If you can sell each meal for $10 and the other costs, (without calculating what the company pays for the chefs), are $5 per meal. Let’s say you hire an additional chef and she can prepare only
The last printer adds 20 books to the total output. Therefore, the marginal productivity of the last printer is 20 books. The marginal productivity of the last printing press is 1000 books. The optimal choice of input is determined by: marginal productivity of printer = marginal productivity of press wage rate of printer cost of press
20 ≠ 1000
20 5000
1 ≠ 0.2, Therefore, optimally, it is best to add a printer versus a press.

Q4: CH 9 (10%)
Gamma Corporation, one of the firms that retains you as a financial analyst, is considering buying out Beta Corporation, a small manufacturing firm that is now barely operating at a profit. You recommend the buyout because you believe that new management could substantially reduce production costs, and thereby increase profit to a quite attractive level. You collect the following product information in order to convince the CEO at Gamma Corporation that Beta is indeed operating inefficiently:
MPL = 25 PL =$20
MPK = 15 PK =$15
Explain how these data provide evidence of inefficiency. How could the new manager of Beta Corporation improve efficiency?
a) If the firm was operating efficiently, the following efficiency condition must hold:

MPL/w = MPk/r Let’s check if this holds.

10/20 < 15/15 (Or 0.5 < 1)

Therefore the firm was not operating efficiently.

b) Currently, the firm is getting more output per dollar spent on capital (because MPL/w < MPk/r). If the firm spends $1 to buy/rent