Consider a small landscaping company run by Mr. Viemeister. He is considering in
ID: 1173619 • Letter: C
Question
Consider a small landscaping company run by Mr. Viemeister. He is considering increasing his firm’s capacity. If he adds one more worker, the firm’s total monthly revenue will increase from $52,000 to $64,000. If he adds one more tractor, monthly revenue will increase from $52,000 to $60,000. Each additional worker costs $4,000 per month, while an additional tractor would also cost $4,000 per month.
Instructions: Enter your answers as whole numbers.
a. What is the marginal revenue product of labor? $.
The marginal revenue product of capital? $.
b. What is the ratio of the marginal revenue product of labor to the price of labor (MRPL/PL)? .
What is the ratio of the marginal product of capital to the price of capital (MRPK/PK)? .
c. Is the firm using the least-costly combination of inputs? (Click to select)NoYes.
d. Does adding an additional worker or adding an additional tractor yield a larger increase in total revenue for each dollar spent?
Explanation / Answer
Marginal revenue product is the additional revenue earned (output) for one additional unit of input holding other factors constant. For example, marginal revenueproduct of labor is the extra output produced by hiring one more worker.
The additional revenue earned by addingone more worker is
a)
The marginal revenue product of capital? $.
Marginal revenue product of capital (MRPK) is the extra output produced by hiring one more unit of capital, in this case it is tractor.
MRPK is $8,000 ( $60,000 - $ 52,000)
b) What is the ratio of the marginal revenue product of labor to the price of labor (MRPL/PL)? .
MRPL = $12,000
PL = $4000 per month
c. Is the firm using the least-costly combination of inputs?
No. since MRPL/PL is 3 which is greater than MRPk/Pk, which is 2.
For least cost combination of inputs MRPL/PL = MRPk/Pk.
d). Does adding an additional worker or adding an additional tractor yield a larger increase in total revenue for each dollar spent?
Invest in an additional labor since the revenue generated is higher for labor, i.e. 3.