Question

Marginal Revenue Product and Demand

Units of Variable Factor	Total Products
0	0
1	20
2	50
3	90
4	120
5	140
6	150
7	150
8	140

Reference: Ref 12-1

(Exhibit: Marginal Revenue Product and Demand) If the product price is $2 per unit and the price of the factor of production is $1080 per unit, the profit-maximizing quantity of the factor is _______ units.

a. 6

b. 2

c. 0

d. 4

Answer 1

Units of variable factors	Total product	Marginal product	Marginal revenue of product
0	0	---	-----
1	20	20	40
2	50	30	60
3	90	40	80
4	120	30	60
5	140	20	40
6	150	10	20
7	150	0	0
8	140	-10	-20

Marginal product =(change in total product / change in variable input)

Marginal revenue product = Marginal product * Price.

Note: Price = MR becasue price is same at each level of output.

The Marginal revenue product of each level of variable input is lower than the price of factor of production. It implies that, it is not benfeficial for a firm to hire even a single unit of fatcor.

Hence, the profit maximizing quantity of factor is 0 units.

Answer: Option (C)

Note: Profit maximizing quantity of factor occurs at the following point.

Marginal revenue product = Price of factor.