Question

A delivery company is considering adding another vehicle to its delivery fleet; each vehicle is rented for $100 per day. Assume that the additional vehicle would be capable of delivering 1,500 packages per day and that each package that is delivered brings in ten cents in revenue. Also assume that adding the delivery vehicle would not affect any other costs.
Required:
a. What is the MRP? What is the MRC? Should the firm add this delivery vehicle?
b. Now suppose that the cost of renting a vehicle doubles to S200 per day. What are the MRP and MRC? Should the firm add a delivery vehicle under these circumstances?
c. Next suppose that the cost of renting a vehicle falls back down to SIOO per day but, due to extremely congested freeways, an additional vehicle would only be able to deliver 750 packages per day. What are the MRP and MRC in this situation? Would adding a vehicle under these circumstances increase the firm's profits?

Answer 1

Answer:

a. What is the MRP? What is the MRC? Should the firm add this delivery vehicle?

marginal revenue product = marginal product of labor x marginal revenue per output unit

MRP = 1,500 packages x $0.10 per package = $150

marginal resource cost (MRC) = $100 (the cost of renting the delivery truck)

The company should add the delivery truck because MRP is higher than MRC.

b. Now suppose that the cost of renting a vehicle doubles to $200 per day. What are the MRP and MRC in this situation?

MRP = $150 (doesn't change from question a)

MRC = $200 (the cost of renting the delivery truck)

The company should not add the delivery truck because MRP is less than MRC.

c. Next suppose that the cost of renting a vehicle falls back down to $100 per day, but, due to extremely congested freeways, an additional vehicle would only be able to deliver 750 packages per day. What are the MRP and MRC in this situation? Would adding a vehicle under these circumstances increase the firm's profits?

MRP = 750 packages x $0.10 per package = $75

MRC = $100

The company should not add the delivery truck because MRP is less than MRC.