Economics

Economics Exam 2 Essay

1. With capital, we mean investments in technology. Capital investment such as machinery and equipment to enhance the productivity of labor can increase the marginal product of labor. In other words, capital investment can enhance productivity of labor given other factors of production remain the same. More college education, if standalone - meaning without additional investment in technology, might not produce the same results.

Thus, capital investment might be a better investment in the short run. However, as the marginal utility of capital investment diminishes, sending labor to college to get further college education might complement the diminishing marginal returns on capital to further enhance productivity. Capital investment and college education or further training at the same time is the best investment option.

In a more objective decision making, the better investment should be identified based on their impact on the marginal product of labor. The investment with the higher impact should be chosen.

2. The rule for optimal input usage tells us that an input is used till the point MRP = MC of the input where MRP is marginal revenue product, MR is marginal revenue and MC is marginal cost. MRP can also be expressed as the product of MR and marginal product of the input.

The input here is the worker/trainee. The cost of this worker is the salary paid that can be taken as the marginal cost of the input. The marginal product refers to the incremental business/market share this worker is able to generate. Without the training MP is low, and this is precisely why the training is given. It is expected that the training will increase MP and this will contribute to growth of the firm. Accordingly the MRP is slow before training and higher after training is complete, as MR remains unchanged and of firm’s control (as it is based on demand conditions for the final good).

As per optimal rule in real life this may not happen and firms...