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Question: Using your knowledge of marginal revenue product, explain the following:

  1. A famous tennis star is paid 200,000forappearingina30โˆ’secondtelevisioncommercial.Theactorwhoplayshisdoublespartnerispaid500.

  2. The president of an ailing savings and loan is paid not to stay in his job for the last two years of his contract.

  3. A jumbo jet carrying 400 passengers is priced higher than a 250-passenger model even though both aircraft cost the same to manufacture.

Short Answer

Expert verified
  1. The tennis star appearing in the television commercial is paid more than the actor as the tennis player increases the revenue, i.e., has more marginal revenue product.

  2. The president of an ailing savings loan has a lower marginal revenue product; thus, the president was removed from the job before the contract period.

  3. The jumbo jet carrying 400 passengers has a higher marginal revenue product than 250 passengers; thus, 400 passengers are priced higher.

Step by step solution

01

Explanation for part (a)

The marginal revenue product labor is the extra revenue obtained when one additional unit of labor is employed. Thus, utilizing the tennis player in the ad can generate more revenue than hiring the actor. Therefore, the tennis player is paid more than the actor as the marginal revenue product of the tennis player is more than the actor.

02

Explanation for part (b)

The president of an ailing savings loan is removed from the post as it might be that the marginal revenue product of the president is negative or low; thus, savings and loans will be better off if the president is removed. The marginal revenue product of the next alternative must be high enough, i.e., the gain from paying the president before the contract period is more than keeping the president in the position.

03

Explanation for part (c)

The jumbo jet carrying 400 passengers has a higher marginal revenue product than the 250 passenger model. The 400-passenger jumbo jet brings more revenue than the 250 passengers; thus, the 400 passenger is more valuable to the airline. Hence, the airline is willing to give more for the 400-passenger jumbo jet.

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Most popular questions from this chapter

A firm uses a single input, labor, to produce output q according to the production function q = 8โˆšL. The commodity sells for 150perunitandthewagerateis75 per hour.

  1. Find the profit-maximizing quantity of L.
  2. Find the profit-maximizing quantity of q.
  3. What is the maximum profit?
  4. Suppose now that the firm is taxed 30perunitofoutputandthatthewagerateissubsidizedatarateof15 per hour. Assume that the firm is a price taker, so the price of the product remains at $150. Find the new profit-maximizing levels of L, q, and profit.
  5. Now suppose that the firm is required to pay a20-percent tax on its profits. Find the new profit-maximizing levels of L, q, and profit.

The demand for labor by an industry is given by the curve L = 1200 - 10w, where L is the labor demanded per day and w is the wage rate. The supply curve is given by L = 20w. What is the equilibrium wage rate and quantity of labor hired? What is the economic rent earned by workers?

You are offered the choice of two payment streams: (a) 150paidoneyearfromnowand150 paid two years from now; (b) 130paidoneyearfromnowand160 paid two years from now. Which payment stream would you prefer if the interest rate is 5 percent? If it is 15 percent?

Question: Suppose that the wage rate is 16perhourandthepriceoftheproductis2. Values for output and labor are in units per hour.

q

l

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20

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47

3

57

4

65

5

70

6

  1. Find the profit-maximizing quantity of labor.

  2. Suppose that the price of the product remains at 2butthatthewagerateincreasesto21. Find the new profit-maximizing level of L.

  3. Suppose that the price of the product increases to 3andthewageremainsat16 per hour. Find the new profit-maximizing L.

  4. Suppose that the price of the product remains at 2andthewageat16, but that there is a technological breakthrough that increases output by 25 percent for any given level of labor. Find the new profit-maximizing L.

Suppose that a firmโ€™s production function is given by Q = 12L โ€“ L2, for L = 0 to 6, where L is labor input per day and Q is output per day. Derive and draw the firmโ€™s demand for labor curve if the firmโ€™s output sells for 10inacompetitivemarket.Howmanyworkerswillthefirmhirewhenthewagerateis30 per day? $60 per day? (Hint: The marginal product of labor is 12 - 2L.)

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