Question

Suppose that a delivery company currently uses one employee per vehicle to deliver packages. Each driver delivers 30 packages per day, and the firm charges $20 per package for delivery. a. What is the MRP per driver per day? b. Now suppose that a union forces the company to place a supervisor in each vehicle at a cost of $300 per supervisor per day. The presence of the supervisor causes the number of packages delivered per vehicle per day to rise to 40 packages. What is the MRP per supervisor per day? By how much per vehicle per day do firm profits fall after supervisors are introduced? c. How many packages per day would each vehicle have to deliver in order to maintain the firm’s profit per vehicle after supervisors are introduced? d. Suppose that the number of packages delivered per day cannot be increased but that the price per delivery might potentially be raised. What price would the firm have to charge for each delivery in order to maintain the firm’s profit per vehicle after supervisors are introduced?

Answer 1

a)The marginal revenue product (MRP) for each driver multiply the number of packages the driver delivers by the cost (price) of each package delivered.

                        MRP = number of packages x price

                                 = 50 x $20

                                 = $1000

b)The presence of the supervisor causes the number of packages delivered per vehicle per day to rise to 60 packages day. per What is the MRP per supervisor per day? By how much per vehicle per day do firm profits fall after supervisors are introduced?

            By placing a supervisor in each truck the total number of packages                 delivered increases from 50 to 60 per truck. This implies that the addition of the supervisor increases deliveries by 10 units.

          The additional revenue the supervisor generates, the marginal revenue product of the supervisor (MRP), is $200.

MRP supervisor = 10 (additional units) x $20 (price) = $200

           Since the supervisor increases the firm's cost by $300 per vehicle and only generates $200 in additional revenue the firm's profits will fall by $100 per vehicle (= $200 (revenue) - $300 (cost)).

c)By adding the supervisor to the vehicle, the company will need to generate $300 in additional revenue to cover the additional cost.

          This implies that each vehicle will need to generate a total of $1300 in revenue (= $1000 (original revenue) +$300 (revenue needed to cover cost of supervisor)).

d)   Given that the price the firm charges for each package is $20, each vehicle will need to deliver 65 packages (=$1300/$20) to maintain profit per vehicle.

       Note that total revenue per vehicle is 65 x $20 = $1300.