Optimizing Operations
Subject Long run factor combinations
Topic Production and costs
Key Words Work force, consumers, productivity, cost, training
News Story

Twenty percent of the U.S. work force works on the road, away from the office. Wireless technologies are helping many of them do their job better. For example, Aramark refreshment services' snack vending machine fillers enter details of each restocking on a personal digital assistant (PDA). The information goes to an Aramark office where it is used to predict what consumers want. Productivity is estimated to have risen 40 percent due to stocking the right goods.

In Coos Bay, Oregon, police officers can submit entries to the police log and run background checks using a wireless network. This saves driving an hour back to headquarters. The fire department expects to introduce a system that shows them where hazardous materials are kept, the layout of a building, and where water is available, as they are traveling to a fire.

Elsewhere, Office Depot drivers scan barcodes on the boxes they deliver using their PDAs so that the shipment can be tracked. As they return to base, sensors cause their PDAs to print out and submit an end-of-day report to headquarters. Physicians can enter prescriptions electronically now, and view patients' medical histories and potential drug reactions. ServiceMaster, a cleaning company, has Greyhound supervisors rate the quality of the bus cleaning using a PDA. This enables ServiceMaster to control quality much better.

The spread of wireless work will be limited, however, by the cost - often $500 to $1,000 for each handheld business PDA. Also, there are concerns about the tiny screens and keypads, and the speed, reliability, and coverage of networks. Workers may be resistant, and will certainly need training.

(Updated August 1, 2001)

1. a) What does an isoquant show?
b) Draw a diagram with the vertical axis representing units of capital and the horizontal axis representing units of labor per period. Add an isoquant.
c) What determines the slope of the isoquant at any point?
d) What happens to the isoquant when wireless PDAs are introduced? Assume that the marginal productivity of capital increases more than the marginal productivity of labor. Illustrate your answer on your diagram.
2. a) What is an isocost line?
b) On your diagram, draw an isocost line tangent to the original isoquant, and mark the optimal combination of capital and labor.
c) What determines the slope of the isocost curve?
d) Why is the point of tangency optimal?
e) What happens to the isocost line when the cost of capital increases, as when PDAs were introduced? Draw a new isocost line tangent to the second isoquant.
f) What happens to the optimal factor combination? On what does your answer depend?
Source Michelle Kessler, "Gadgets give workers on the run a leg up," USA Today, June 26, 2001.

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