Question

In: Economics

You have a choice: Work at the marketing agency for $15 per hour, for however many...

You have a choice:

  1. Work at the marketing agency for $15 per hour, for however many hours you'd like
  2. Or sell software apps at $5 per app

Note: you're indifferent about the two tasks, all you care about is making money

Given the following Table:

Hours per Day

Total Software

Selling Software

Apps Sold

0

0

1

10

2

18

3

24

4

29

5

33

6

36

7

38

8

39

Questions:

  1. Should you spend 3 hours selling software? Why?
  2. Should you spend 6 hours selling software? Why?
  3. Should you spend 8 hours selling software? Why?
  4. After which hour should you stop selling software? Why?
  5. What is the lowest price you’d be willing to sell your app at for the 1st hour? Why?
  6. What is the lowest price you’d be willing to sell your app at for the 3rd hour? Why?
  7. What is the lowest price you’d be willing to sell your app at for the 7th hour? Why?

Solutions

Expert Solution

Hours Total Product Marginal Product of Apps Marginal Revenue Product
0 0
1 10 10 50
2 18 8 40
3 24 6 30
4 29 5 25
5 33 4 20
6 36 3 15
7 38 2 10
8 39 1 5

The company should sell software until Marginal Revenue Product of software sold (MRP) is greater than or equal to the total wages paid.

At 3 hours MRP is $30 and wages paid is 3*15 = $45. Since MRP is less than wage rate , so it would not be wise to spend 3 hours selling software

At 6 hours the MRP is $15 and wages paid is $15 * 6 = $90. Since MRP is less than wages paid , so it is not wise to spend 6 hours selling software.

At 8 hours the MRP is $5 and wages paid is $15 * 8 = $120. Since MRP is less than wages paid so it is not wise to spend 8 hours for selling software.

The organization should stop selling software after 2 hours. Until 2 hours the MRP is greater than wage rate i.e ( 50 > 15 , 40 > 30 respectively for 1 and 2 hours) After 2 hours Wages exceeds the MRP.

Lowest price for 1 hour will be equivalent to the wages paid i.e $15. If organization goes below this for selling app then it will incur losses because MRP >= Wages

Lowest Price for 3 hour will be $15 * 3 = $45. If the organization goes below this price for selling app it will incur losses. (MRP should be greater than or equal to wages paid)

Lowest price for 7th hour will be $15 * 7 = $105. Again MRP should be equal to or greater than wages paid. If goes below this price then wages paid will be more but marginal revenue product of additional software sold will be less thus resulting into losses.

Rahul Sunny answered 1 year ago
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