Consider a small landscaping company run by Mr. Viemeister. He is considering in
ID: 1255091 • 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 $50,000 to $58,000. If he adds one more tractor, monthly revenue will increase from $50,000 to $62,000. Additional workers each cost $4000 per month, while an additional tractor would also cost $4000 per month.a. What is the marginal product of labor? The marginal product of capital?
MPL = $¬______
MPK = $¬______
b. What is the ratio of the marginal product of labor to the price of labor (MPL / PL )?
MPL / PL = ¬______
What is the ratio of the marginal product of capital to the price of capital (MPK/ PK )?
MPK / PK = ¬______
c. Is the firm using the least-costly combination of inputs?
Choose:
1. Yes, because MPK/PK = MPL/PL.
-or-
2. No, because MPK/PK > MPL/PL.
d. Does adding an additional worker or adding an additional tractor yield a larger increase in total revenue for each dollar spent?
Choose:
1. Revenue is increased more by spending money on an additional worker.
-or-
2. Revenue is increased more by spending money on an additional tractor.
Explanation / Answer
a. Marginal Product = (change in output)/(change in resource) MPL = (58,000 - 50,000)/1 i.e. MPL = 8,000 MPK = (62,000 - 50,000)/1 i.e. MPK = 12,000 b. MPL / PL = 8,000/4,000 i.e. MPL / PL = 2 MPK / PK = 12,000 i.e. MPK / PK = 3 c. No, because MPK/PK>MPL/PL (If they would be equal it would be least costly) d. Revenue is increased more by spending money on an additional tractor. This is because MPK>MPL (The revenue will increase by 12,000 for 1 more tractor whereas it will increase by 8,000 for 1 more worker)