Assume that an appliance manufacturer is employing variable resources X and Y in such amounts that the MRPs of the last units of X and Y employed are $100 and $60, respectively. Resource X can be hired at $50 per unit and resource Y at $20 per unit. The firm
A) should hire more of both X and Y.
B) should hire more of Y and less of X.
C) is producing with the least-costly combination of X and Y but could increase its profits by employing more of X and less of Y.
D) is using the least-costly combination of X and Y but could increase its profits by employing less of both X and Y.

Question

Quizplus · Accepted Answer

The firm should hire more of both X and Y because their MRP (Marginal Revenue Product) is greater than their cost of hiring. This implies that the firm will earn more revenue than the cost of hiring these resources by hiring more of them. Specifically, hiring one more unit of X will increase revenue by $100 and hiring one more unit of Y will increase revenue by $60, while the costs of hiring them are $50 and $20, respectively. Therefore, hiring more of both resources will increase profits for the firm.

Assume That an Appliance Manufacturer Is Employing Variable Resources X