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Optimization of inputs: Labor vs. capital

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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 Largo Publishing House uses 400 printers and 200 printing presses to produce books. A printer's wage rate is $20, and the price of a printing press is $5,000. The last printer added 20 books to total output, while the last press added 1,000 books to total output. Is the publishing house making the optimal input choice? Why or why not? If not, how should the manager of Largo Publishing House adjust input usage?

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Solution Summary

This solution examines two common management decisions: 1) Should a manager hire a worker even if he causes diminishing returns? 2) How can a manager use marginal product theory to optimize his inputs of labor and capital?

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1. The statement is not correct. If the new worker causes diminishing returns, it means that he produces less than the worker hired before him. However, even if he produces less, the new worker can still increase the company's profits. Imagine a printing company that can hire workers for ...

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