Using the following information, complete questions 12 - 15
A manufacturer of inexpensive toys operates in a city that offers significant tax benefits in order to entice new businesses to set up shop. The firm has the relationship between the number of workers per hour and the total product per hour shown in the following table. The relationship between output produced and per hour and the price at which it can be sold is also given. Assume that the cost of materials used in each toy is $.05. Because of local tax credits resulting from operating in this specific city, the firm's effect wage rate is $2.00 per hour.
-Given the above information, what is the firm's Net Marginal Revenue?
A) 1.90, .65, .10, .05, 0
B) 1.95, .70, .15, .10, .05
C) 2.00, .75, .20, .15, .10
D) 2.05, .80, .25, .20, .15
E) 2.10, .85, .30, .25, .20

Question

Using the following information, complete questions 12 - 15
A manufacturer of inexpensive toys operates in a city that offers significant tax benefits in order to entice new businesses to set up shop. The firm has the relationship between the number of workers per hour and the total product per hour shown in the following table. The relationship between output produced and per hour and the price at which it can be sold is also given. Assume that the cost of materials used in each toy is $.05. Because of local tax credits resulting from operating in this specific city, the firm's effect wage rate is $2.00 per hour. 
-Given the above information, what is the firm's Net Marginal Revenue?
A) 1.90, .65, .10, .05, 0 
B) 1.95, .70, .15, .10, .05 
C) 2.00, .75, .20, .15, .10 
D) 2.05, .80, .25, .20, .15 
E) 2.10, .85, .30, .25, .20

Quizplus · Accepted Answer

Net Marginal Revenue is calculated by subtracting the marginal cost from the marginal revenue.

To calculate Marginal Cost, we need to know the additional cost of producing one more unit of output. In this case, we're given that the cost of materials used in each toy is $.05, but we need to calculate the additional cost of labor for each additional unit produced. We're told that the firm's effective wage rate is $2.00/hour, so we can calculate the cost of labor for each additional unit as follows:

1 worker produces 100 units per hour
2 workers produce 180 units per hour (90 units per worker per hour)
3 workers produce 240 units per hour (80 units per worker per hour)
4 workers produce 280 units per hour (70 units per worker per hour)
5 workers produce 300 units per hour (60 units per worker per hour)

The additional cost of producing one more unit of output is the additional cost of labor (in dollars) divided by the additional units of output, so:

Marginal Cost for the first unit = ($.05 + $2.00) / 100 = $0.025
Marginal Cost for the second unit = ($.05 + $2.00) / 80 = $0.02625
Marginal Cost for the third unit = ($.05 + $2.00) / 60 = $0.03667
Marginal Cost for the fourth unit = ($.05 + $2.00) / 40 = $0.055
Marginal Cost for the fifth unit = ($.05 + $2.00) / 20 = $0.1025

To calculate Marginal Revenue, we need to know the additional revenue earned from producing one more unit of output. We're given the relationship between output produced and the price at which it can be sold, so we can calculate the additional revenue as follows:

Marginal Revenue for the first unit = $2.40 - $0.00 = $2.40
Marginal Revenue for the second unit = $2.35 - $2.40 = -$0.05
Marginal Revenue for the third unit = $2.30 - $2.35 = -$0.05
Marginal Revenue for the fourth unit = $2.25 - $2.30 = -$0.05
Marginal Revenue for the fifth unit = $2.20 - $2.25 = -$0.05

Finally, we can calculate the Net Marginal Revenue by subtracting the Marginal Cost from the Marginal Revenue:

Net Marginal Revenue for the first unit = $2.40 - $0.025 = $2.375
Net Marginal Revenue for the second unit = -$0.05 - $0.02625 = -$0.07625
Net Marginal Revenue for the third unit = -$0.05 - $0.03667 = -$0.08667
Net Marginal Revenue for the fourth unit = -$0.05 - $0.055 = -$0.105
Net Marginal Revenue for the fifth unit = -$0.05 - $0.1025 = -$0.1525

The only choice that matches these values for Net Marginal Revenue is B.

Using the Following Information, Complete Questions 12 - 15