Intuition Question Suppose a firm had two methods to assembl

Intuition Question Suppose a firm had two methods to assemble a new smartphone. The first method utilizes 2 hours of labor and 4 units of capital, while the second method uses 4 hours of labor and 1 unit of capital. Under which conditions would the firm want to use the first method? (Be specific)

Solution

Objective: Assemble a smart phone

Resource Option 1: 2 Hours of Labour + 4 units of capital

Resource Option 2: 4 Hours of Labor + 1 unit of capital

Now, if you were in place of the firm and you have to take the decision, how would do it?

We will simply look at the productivity or output from the two methods.

Now, we know that both the inputs will fetch us the same output, this is not a better option to compare the two options.

Can we look at the efficiency of the two options? Absolutely Yes! We should look at the efficiency of the resources. By efficiency here, we would mean the productivity or how quickly can we expect both the option to assemble the phone.

What are the criteria to look at the efficiency of the labor? It is Marginal Product of labor (MPL) and the same way we have MPK (Marginal product of capital).

So, we will choose the option where we have the ratio of MPK and MPL greater.

So, we will choose both the options and see where MPK / MPL is greater.

The firm would choose option 1 if,

MPK/MPL for option 1 > MPK/MPL for option 2