After two quaters of increasing levels of production,the CEO of Canadian Fabrica
ID: 1190929 • Letter: A
Question
After two quaters of increasing levels of production,the CEO of Canadian Fabrication and Design was upset to learn that,durning this time of expansion,productivity of the newly hired sheet metal workers declined with each new worker hired. Believing that the new workers were lazy or inefficiently supervised, the CEO instructed the shop foreman to "crack down" on the new workers to bring their productivity. Explain in the terms of production theory why it might be that no amount of "cracking down" can increase workers' productivity at Canadian Fabication and Design?
Explanation / Answer
Productivity is low b/c there is not enough capital for new workers to use - e.g. there are not enough tools, or not enough space.
Adding more workers diminishes productivity due to the principle of diminishing marginal returns to a variable input. Basically, when you add more and more of a variable input (in this case, labor), you will reach a point beyond which the resulting increase in output starts to diminish. This is exactly what is going on here as Canadian Fabrication & Design continues to add labor without adding more of other inputs as well.
Instead of "cracking down" the firm should consider adding more of other production inputs (capital, etc). Productivity is maximized when inputs are properly matched, and thus increasing other capital inputs will allow CF&D to reverse the productivity losses it was seeing as it continued to add labor in isolation of other inputs.