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Consider a small landscaping company run by Mr
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 $62,000. If he adds one more tractor, monthly revenue will increase from $50,000 to $68,000. Each additional worker costs $6,000 per month, while an additional tractor would also cost $6,000 per month.
a) What is the marginal revenue product of labor? What is 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?
Expert Solution
a) The marginal revenue product of labor = increase in revenue from an additional unit of labor = 62,000 - 50,000 = $12,000.
The marginal revenue product of capital = increase in revenue from an additional unit of tractor = 68,000 - 50,000 = $18,000.
b) Ratio of the marginal revenue product of labor to the price of labor = 12,000 / 6,000 = 2. Ratio of the marginal product of capital to the price of capital = 18,000 / 6,000 = 3.
c) No, the firm is not using the least costly combination of inputs.
The marginal revenue product per dollar of labor is lower than the marginal revenue per dollar of capital, indicating that the firm has hired too many workers relative to what is optimal. If the firm hire one fewer worker and one more tractor, there is no change in cost because the cost of one per worker per month is the same as that of a tractor, but could increase revenue by (18,000 - 12,000) = $6,000.
d) Adding an additional tractor yields $3 more revenue per dollar spent, which is higher than the $2 dollar increase in revenue per dollar spent on worker.
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