Question

3. Critical analysis Q3

Compute-Accounting, Inc., uses computer technology and data-entry operators to provide accounting services in a competitive market. For each accounting statement processed, the firm receives a $200 fee (column 4 in the following table). Given the firm’s current fixed capital, column 2 shows how total output changes as additional data entry operators are hired. The marginal revenue product (MRP) schedule (column 6) indicates how hiring an additional operator affects the total revenue of the firm. Because a profit-maximizing firm will hire an additional employee if, and only if, the employee adds more to revenues than to costs, the marginal revenue product curve is the firm’s short-run demand curve for the resource.

Units of Variable Factor	Total Output	Marginal Product	Price per Statement	Total Revenue	MRP
(1)	(2)	(3)	(4)	(5)	(6)
(Data-Entry Operators)	(Accounting Statements Processed per Week)	(Change in Column 2 ÷ Change in Column 1)	($ per Statement)	(Column 2 x Column 4)	(Column 3 x Column 4)
0	0.0		$200	$0
		5			$1,000
1	5		$200	$1,000
		4			$800
2	9		$200	$1,800
		3			$600
3	12		$200	$2,400
		2			$400
4	14		$200	$2,800
		1.5			$300
5	15.5		$200	$3,100
		1			$200
6	16.5		$200	$3,300
		0.5			$100
7	17		$200	$3,400

Suppose the weekly wage of data-entry operators is $250.

In order to maximize profits, Compute-Accounting would hiredata-entry operators.

What would the firm’s maximum profit be if its fixed costs were $1,500 per week?

$100

$650

$350

$300

Suppose there was a fall in demand for accounting services, decreasing the market price per monthly statement to $150. Assume that the wage of a data-entry operator is still $250 per week. The following table shows the new short-run demand schedule.

Units of Variable Factor	Total Output	Marginal Product	Price per Statement	Total Revenue	MRP
(1)	(2)	(3)	(4)	(5)	(6)
(Data-Entry Operators, Column 1)	(Accounting Statements Processed per Week)	(Change in Column 2 ÷ Change in Column 1)	($ per Statement)	(Column 2 x Column 4)	(Column 3 x Column 4)
0	0.0		$150	$0
		5			$750
1	5		$150	$750
		4			$600
2	9		$150	$1,350
		3			$450
3	12		$150	$1,800
		2			$300
4	14		$150	$2,100
		1.5			$225
5	15.5		$150	$2,325
		1			$150
6	16.5		$150	$2,475
		0.5			$75
7	17		$150	$2,550

In order to maximize profits, Compute-Accounting would now hiredata-entry operators.

Answer 1

1. A firm will hire the data entry operator till the point where MRP is higher than wage rate.

Thus, firm will hire 5 data entry operator.

Wage rate is 250.

So, data entry operator cost = $250 * 5.

Data entry operator cost = $1250.

Fixed cost= $1500.

Total cost = $1250 + $1500.

Total cost = $2750.

Total revenue generated by 5 data entry operator is $3100.

Profit = Total Revenue - Total Cost.

Profit = $3100 - $2750.

Profit = $350.

Answer: option (c).

2. Till 4 data entry operator the MRP is higher than wage rate of $250.

Hence firm should hire 4 data entry operator to maximize profit.

Answer: 4 data entry operator.