Question

A delivery company is considering adding another vehicle to its delivery fleet; each vehicle is rented for $300 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 $0.30 in revenue. Also assume that adding the delivery vehicle would not affect any other costs.
Required:
a) What are the MRP and MRC?
b) Now suppose that the cost of renting a vehicle doubles to $600 per day. What are the MRP and MRC?
Should the firm add a delivery vehicle under these circumstances? Yes/No

Answer 1

Answer:

a) MRP = $450

MRC = $300

b)  MRP = $450

MRC = $600

No

Explanation:

a) Marginal revenue product (MRP) is the change in revenue created due to an increase in resources.

MRP = Revenue change /  additional input

The revenue change as a result of adding one vehicle= 1500 packages/day * $0.3 = $450. The additional input is 1 vehicle

MRP = Revenue change /  additional input = $450 / 1 = $450

Marginal revenue cost (MRC) is the change in cost as a result of additional resource.

MRC = Change in resource cost / additional input

Since adding a vehicle is rented at $300/day, the Change in resource cost is $300.

MRC = $300 / 1 = $300

b) MRP = Revenue change /  additional input = $450 / 1 = $450

MRC = Change in resource cost / additional input =  $600 / 1 = $600

The firm should not add a delivery vehicle because the MRC exceeds the MRP, therefore the firm would be at a loss