assume a pencil manufacturer is employing resources C and D in such quantities that the MRPs...

assume a pencil manufacturer is employing resources C and D in such quantities that the MRPs of the last units are $80 and $50 respectively. The price of resource C is $90 and the price of D is $35. To maximize profits what changes in resource usage must this firm make?.

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Expert Solution

From the above question following information is given,

Resources	Marginal Revenue Product		Price of Resource
C	$80	<	$90
D	$50	>	$35

Resource means laborers

Marginal Revenue Product - It refers to the additional revenue generated by additional labor or resource hired.

Price of Resource - It refers to the cost of hiring the resources. For example labor cost.

If marginal revenue product is greater than the price of resource that means additional revenue generated by additional labor is greater than the additional cost of hiring that resource which is a profit for a firm hence the firm should continue hiring additional resources.

If marginal revenue product is less than the price of resource that means additional revenue generated by the additional resource is lesser than the additional cost of hiring that resource which is a loss for a firm hence the firm should stop hiring additional resources.

Thus the firm should hire resources till marginal revenue product is equal to the price of resource.

Now in this case, if C is hired then the marginal revenue product is $80, and the price of the resource is $90 which means additional revenue is less than additional cost which is a loss hence the pencil manufacture should hire less of C.

if D is hired then the marginal revenue product is $50, and the price of the resource is $35 which means additional revenue is more than additional cost which is a profit hence the pencil manufacture should hire more of D.

Rahul Sunny answered 2 months ago

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