Consider a company that produces dog toys. The only resources that the company uses to produce these toys are Capital (i.e. machines and raw materials) and Labor (i.e. workers). The company sells 10,000 toys a month at $100 per toy. The company’s own internal research shows 60% of the revenue is from the use of the Capital and the other 40% of the revenue is from the use of the Labor. The unit cost of Capital is $40 and the unit cost of Labor is $50. The toy company’s production budget is $900,000.
(a) Write down the toy company’s budget equation and show it on a well-labeled graph (put Labor on the y-axis).
(b) If the toy company is to hire 10,000 units of the Capital, what would be the maximum number of workers that the company can hire?
(c) What would be the opportunity cost of Labor in terms of Capital? What does this opportunity cost tell us in this example?
(d) At the current condition (i.e. given the above information), is the company satisfying the “Golden Mean” condition? Please explain why or why not. If not, what adjustment the company should make?