Productivity Measurement, Technical and Allocative Efficiency,Partial Measures
Carsen Company produces handcrafted pottery that uses twoinputs: materials and labor. During the past quarter, 25,000 unitswere produced, requiring 100,000 pounds of materials and 50,000hours of labor. An engineering efficiency study commissioned by thelocal university revealed that Carsen can produce the same 25,000units of output using either of the following two combinations ofinputs:
| F1 | F2 |
| Combinations: | | |
| Materials | 78,000 | 84,600 |
| Labor | 31,000 | 33,200 |
The cost of materials is $7 per pound; the cost of labor is $12per hour.
Required:
1. Compute the output-input ratio for eachinput of Combination F1. If required, round your answers to twodecimal places.
Does this represent a productivity improvement over the currentuse of inputs?
What is the total dollar value of the improvement?
$
Classify this as a technical or an allocative efficiencyimprovement.
2. Compute the output-input ratio for eachinput of Combination F2. If required, round your answers to twodecimal places.
Does this represent a productivity improvement over the currentuse of inputs?
Now, compare these ratios to those of Combination F1. What hashappened?
F2 has productivity for materialsand productivity for labor.
3. Compute the cost of producing 25,000 unitsof 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 aproductivity improvement?
