Answer to Question #175419 in Microeconomics for Ryan Cirella

Question

 Use the tools we’ve discussed so far in Module 3 to explain these trends in US manufacturing. Specifically, you need to address how it’s possible to produce the same output with fewer workers – what’s making US manufacturing workers more productive? A big hint: the rental price of capital follows long-term interest rates in the US pretty closely. If you argue that something causes firms to change their behavior, use a specific argument like “buck for the bang” to explain why.

  If we assume that firms were minimizing their costs before, the lower rent

Answer 1

Firms use factors of production to produce a certain level of output. Generally, there are two factors considered: labour and capital in production; a firm will combine both or use one of the factors to produce the optimal output level. Recently, US firms have been applying capital-intensive methods in their production, thus reducing the number of workers on the site, but that has seen the output increase. If the rental price of capital decreases due to the decreasing interest rate in the US, then it means that manufacturing firms will use more capital and less labour in their production mix. The ratio of the marginal physical product of capital to labour is low because the wage rate is higher than its rental price.

Considerably, US manufacturing workers have become more productive because they have been trained and educated well. They have improved working conditions, and they have improved the workers' wage rate, boosting their motivation for efficiency. Further, most of the manufacturing firms have updated processes and technology for maximum production.