Cost Reduction Strategy Analysis
A manufacturing firm's production process relies solely on labor, and its average cost per unit is determined by its nominal wage and a constant rate of labor productivity. The management team is evaluating two proposals to reduce this average cost:
- Proposal 1: Negotiate a 10% decrease in the nominal wage paid to workers.
- Proposal 2: Invest in new technology that is projected to increase labor productivity by 10%.
Evaluate which of these two proposals, if any, would be more effective in reducing the firm's average cost per unit. Justify your conclusion with a clear explanation.
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