Question

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

1. A famous tennis star is paid \(200,000 for appearing in a 30-second television commercial. The actor who plays his doubles partner is paid \)500.

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

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

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.

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.

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.