Question

You have been hired by the No Hassle Collection Agency to provide economic advice. The owner of the agency tells you that No Hassle's only variable input is the number of collection agents. The hourly wage for collection agents is $40.00. The marginal revenue product curve for collection agents reaches its maximum at five workers with a marginal revenue product of $34.00. What advice would you give this firm?

Answer 1

Answer:

The marginal revenue product has a property known as diminishing marginal return.

The property of diminishing marginal return tells us that theres an amount of input that maximizes revenue, and after this point is reached, additional units of input less addional revenue until diminishing it.

In this example, the Collection Agency is way past the maximum revenue point (located at $34.00 per worker). It needs to lay off employees until it goes from the current $40.00 marginal revenue product, until $34.00 marginal revenue product.