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Productivity Measurement, Technical and Allocative Efficiency, Partial Measures

Carsen Company produces handcrafted pottery that uses two inputs: materials and labor. During the past quarter, 27,000 units were produced, requiring 108,000 pounds of materials and 54,000 hours of labor. An engineering efficiency study commissioned by the local university revealed that Carsen can produce the same 27,000 units of output using either of the following two combinations of inputs:

	F1	F2
Combinations:
Materials	74,000	84,200
Labor	36,000	33,600

The cost of materials is $7 per pound; the cost of labor is $15 per hour.

Required:

1. Compute the output-input ratio for each input of Combination F1. If required, round your answers to two decimal places.

Materials
Labor

Does this represent a productivity improvement over the current use of inputs? yes or no?

What is the total dollar value of the improvement? $_______

Classify this as a technical or an allocative efficiency improvement. Allocative efficiency or Technical efficiency?

2. Compute the output-input ratio for each input of Combination F2. If required, round your answers to two decimal places.

Materials
Labor

Does this represent a productivity improvement over the current use of inputs? yes or no?

Now, compare these ratios to those of Combination F1. What has happened? F2 has (lower or higher) productivity for materials and (lower or higher) productivity for labor.

3. Compute the cost of producing 27,000 units of output using Combination F1. $________

Compare this cost to the cost using Combination F2.

Cost of Combination F1	$
Cost of Combination F2
Difference	$

Does moving from Combination F1 to Combination F2 represent a productivity improvement?

Yes or no?

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