Question

WordBoss, Inc. uses 4 word processors and 2 desk-top computers to generate reports. The marginal product of a word processor is 50 pages per hour and the marginal product of a desk-top computer is 500 pages per hour.

If the rental price of a word processor is $1 per hour and the rental price of a desk-top computer is $10 per hour, is WordBoss utilizing word processors and desk-top computers efficiently?

If the price of each page produced is $0.10, what is the value marginal product of a word processor?

If the price of each page produced is $0.10, what is the value marginal product of a desk-top computer?

If the rental price of a desk-top computer decreases to $5 per hour, how should WordBoss respond?

Answer 1

Marginal Product of Word processor MPw = 50

Marginal Product of Desktop computer MPd = 500

Now the firm will be at the optimum point where the ratio of Marginal Product of Word Processor and Desktop is equal to the ratio of the rental price Word processor and Desktop.

Hence we have, 50/500 = 1/10. Hence WordBoss is utilizing word processor and desktop computers efficiently.

The Value of Marginal Product = Marginal Product * Price of the product.

Value marginal product of a word processor = 50*$0.10 = $5

Value marginal product of a Desktop Computer = 500*$0.10 = $50

Now the rental Price of desktop computer decreases to $5.

Marginal Product of Word Processor / Desktop = Rental price of Word processor / Rental price of Desktop.

50/500 < 1/5

To achieve the equilibrium, the firm will increase the usage of Desktop computer. The increase will result in a decline in the Marginal product of Desktop computer due to Law of diminishing returns. This process will continue until the equilibrium condition is achieved.