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 $54,000 to $66,000. If he adds one more tractor, monthly revenue will increase from $54,000 to $62,000. Each additional worker costs $4,000 per month, while an additional tractor would also cost $4,000 per month.
. 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?

d. Does adding an additional worker or adding an additional tractor yield a larger increase in total revenue for each dollar spent?

Answer 1

Answer:

A.$12,000

B.$8000

C.MRPL/PL = 3

MRPK/PK =2

D) Since each of the above calculated ratios are more than one, therefore adding additional worker or tractor will increase the total revenue for each of the dollar spent.

Explanation:

(a) The Marginal Revenue Product of Labor (MRPL) can said to be the additional revenue generated when an additional worker is employed.

$66,000 - $54,000 = $12,000

Thus, MRPL is 12,000

b) Marginal revenue product of capital is

( 62000 - 54000)= $8000

c) MRPL/PL = 12000/ 4000= 3

MRPK/PK = 8000/4000=2

Therefore Since these two ratios are not equal it means the firm is not using the least cost combination of inputs.

d) Since each of the above calculated ratios are more than one, therefore adding additional worker or tractor will increase the total revenue for each of the dollar spent.