Question

Consider a small landscaping company run by Mr. Viemeister. He is considering increasing his firm’s capacity....

Consider a small landscaping company run by Mr. Viemeister. He is considering increasing his firm’s capacity. If he adds one more worker, the firm’s total monthly revenue will increase from $50,000 to $62,000. If he adds one more tractor, monthly revenue will increase from $50,000 to $58,000. Each additional worker costs $4,000 per month, while an additional tractor would also cost $4,000 per month.

a. What is the marginal revenue product of labor?

The marginal revenue product of capital?

b. What is the ratio of the marginal revenue product of labor to the price of labor (MRPL/PL)?

What is the ratio of the marginal revenue product of capital to the price of capital (MRPK/PK)?

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Answer #1

The marginal revenue product of labor is the change in revenue due to an increase in an unit of labor.

The marginal revenue product of capital is the change in revenue due to an increase in an unit of Capital.

a.

The marginal revenue product of labor= Change in revenue / Change in number of worker

The marginal revenue product of labor= (62000-50000)/1= 12000

The marginal revenue product of capital= Change in capital / Change in number of worker

The marginal revenue product of capital= (58000-50000)/1= 8000

b.

Price of labor= $4000

MRPL/PL= 12000/4000= 3

Price of capital= $4000

MRPK/PK= 8000/4000= 2

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