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 $72,000. 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? 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

Given:
adds one more worker, total monthly revenue will increase from 54,000 to 66,000
adds one more tractor, total monthly revenue will increase from 54,000 to 72,000
additional worker costs 6,000 per month
additional tractor costs 6,000 per month

Marginal Revenue of labor = 66,000 - 54,000 = 12,000
Marginal Revenue of capital = 72,000 - 54,000 = 18,000

MRPL/PL = 12,000 / 6,000 = 2
MRPK/PK = 18,000 / 6,000 = 3