The labor dispute between General Motors and the United Auto Workers involves two union locals which have gone on strike against two Flint, Michigan, parts plants. As a result, 122,400 GM workers have been laid off, causing most manufacturing to cease. The union contends that GM broke an agreement to invest $300 million in the Flint metal-stamping plant. It was also irritated by the removal of stamping dies out of the plant over Memorial Day weekend. GM denies that the investment was part of a labor agreement. The rationales for its actions are productivity and staffing levels: it believes that work practices are uncompetitive.

Since labor negotiations are headed nowhere, and GM is losing $75 million a day, it is asking each business unit to cut discretionary costs such as travel, overtime, consultants, and off-site meetings. Even the annual event, welcoming the thousands of summer interns, was canceled.
(Updated August 18, 1998)

1. GM is complaining about inefficient work practices. Draw a diagram with the vertical axis representing output of the parts plants and the horizontal axis measuring labor inputs. Add a total product curve assuming that the amount of capital is fixed.
   1. What does the total product curve represent?
   2. Where, according to GM, is its current position? Mark it on your diagram.
   3. Where would GM prefer to be? Again, indicate this on your diagram.
   4. If, in the long run, GM were to invest $300 million in new equipment, how would your diagram change? Illustrate.

2. GM is attempting to reduce its costs. Draw a diagram relating costs and prices on the vertical axis to output on the horizontal axis. Show the marginal cost and average total and average variable cost curves.
   1. Which types of discretionary spending that GM is trying to cut are variable costs? Which are fixed costs? Explain the distinction that you have made.
   2. If management is successful in reducing its variable costs, how would the curves be affected? Illustrate on your diagram.
   3. What would happen to the curves if fixed costs were successfully reduced? Show any movement of the curves on a second diagram.