Microeconomics the Most Common Way of Deciding Essay

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The most common way of deciding between these two options is through capital budgeting. If the two decisions are mutually exclusive, a net present value analysis will determine which of these options is better for the store in the long run. This type of analysis involves calculating the incremental cash flows that derive from the decision, and then discounting them back to the present day. The up front cash flows should also be included in the calculation. Between two mutually exclusive options, the one with the higher NPV -- as long as it is positive -- is the option that should be selected.

However, in the course of conducting such a calculation, it will become apparent that these two tactics solve different problems. The confusion probably lies in the fact that the root issue is the same. If increasing capacity is the solution (and both of these options increase capacity), then the store needs to determine which of the issues (the workers or the equipment) is the source of the backlog. This speaks to fundamental principles of production -- one can increase capacity by reducing workflow backlogs, but increasing capacity in other areas that are not subject to backlog is unlikely to achieve any real measure of success, because the backlog will still be a constraint on capacity.

Thus, if the machine is the problem, hiring too much labor without the capital upgrade will not result in a significant increase in capacity. The store will not be able to turn out fries and burgers any faster with double the staff working on the same equipment, and this must be taken into consideration when calculating the incremental cash flows. The additional capital will increase the capacity of the store's equipment, and once that occurs it be found that the current staff size is insufficient to use this equipment to its maximum capacity. At this point, the company can hire new staff, knowing that this will result in capacity improvements and therefore deliver to the company a more efficient workflow during peak times.

2. The marginal decision rule holds that a firm should "expand product if and only if the price is greater than the marginal cost" (Baker, 2000). Vargas (2001) outlines the case of maquiladoras and their influence on the American economy. One of the key issues that she discusses is the production mix. She cites as example the plastic injection industry, which thrives in Texas border cities like El Paso and McAllen. These plants support the maquiladoras located across the border in Mexico.

These plants highlight the relevance of the marginal decision rule and the issue of the mix of the factors of production. Firms produce goods if they can sell them at a profit. This means that in order to justify expanded production, firms need to find ways to lower the cost of production, to keep the marginal cost of an additional unit lower than the price. While it appears that Mexican maquiladoras do not have the ability to product injection plastics, American companies can. The rest of the assembly is done in Mexico, taking advantage of the low cost of Mexican labor. As the result of this mix of the factors of production, companies utilizing the maquiladora system can lower their marginal cost of production without compromising on the quality of the good that they are producing, since the higher-end components can still be sourced from the United States.

3. Generic drug companies are so successful because the cost of manufacturing most drugs is quite low. The reason that prescription drugs are so expensive is because the FDA gives drug developers extensive patent protections. The drug makers then leverage these protections to charge monopoly rents on their drugs. When the patent protections lapse, then the market becomes competitive. Drugs, which by their…

Sources Used in Document:

Works Cited:

Baker, S. (2000). Marginal cost and the output rate under competition. Economics Interactive Tutorial. Retrieved March 8, 2012 from http://hadm.sph.sc.edu/courses/ECON/MCost/MCost.html

NetMBA. (2010). Capital budgeting. NetMBA.com. Retrieved March 7, 2012 from http://www.netmba.com/finance/capital/budgeting/

Rittenberg Libby and T. Tregarthen. (2009). Chapter 8: Production and Costs. Sections 1-4 Principles of Microeconomics. FlatworldKnowledge.com. Retrieved December 2, 2011 from:


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