Question

Old process New process

Output per hour 100 125
Labor cost per 8 hour shift 240 160
Capital cost per 8 hour shift 640 1000
With the expansion, they have the opportunity to either use their current equipment or to invest in new technology. Based on the multi-factor productivity, which is the best option?
A. Use the new process.
B. They both are equally good.
C. Use the old process.

Answer 1

C. Use the old process.

Step-by-step explanation:

Multi-factor productivity is nothing but the measure that gives clear picture about the overall efficiency based on the labor and capital inputs used in the production process.

Total cost = Labour cost + Capital cost

Total cost = $240 + $640

Total cost (old) = $880

Total cost (new) = $160 + $1000

Total cost (new) = $1160

Multi-factor productivity = Outlay per hour * 8 / Total cost per hour per 8 hours

MFP (old) = 100 * 8 / 880 = 0.91

MFP (new) = 125 * 8 / 1160 = 0.86

So, based on MFP, Use the old process as it is more efficient.