Quiz 12: Pure Monopoly


(a) To find the marginal revenue product (MRP), we need to find out how much one unit of the resource will get the firm in terms of revenue. See that an additional vehicle for this firm will deliver 1500 packages per day, with each package delivered bringing $0.10 of revenue. This means that an additional vehicle will generate $1500 times $0.10, or $150 of profit per day. Therefore, MRP=$150 per day. To find the marginal resource cost (MRC), we simply need to find the cost of having this extra unit of resource. We are given in the problem that the vehicle can be rented for $100 per day, so MRC=$100 per day. Since the MRP is greater than the MRC, this means that the revenue that the vehicle will bring it is higher than the cost of the vehicle. Because of this, the firm will profit by employing an additional vehicle, so yes, it should add the delivery vehicle. (b) If the cost of renting the vehicle doubles to $200, we see that MRP will not change because the vehicles will still deliver 1500 packages at $0.10 per package. Therefore, MRP is still $150 per day. However, the MRC is now $200 because to rent this vehicle, the cost to the firm is $200. In this case, the firm should not add the vehicle because the cost to the firm is higher than the revenue that the firm can get from employing the delivery vehicle. (c) If the vehicle can now only deliver 750 packages a day, this means that the MRP is now $0.10 times 750, which is $75. In other words, hiring this vehicle will get the firm an additional $75 of profit. The rental rate of this vehicle is given to be $100 per day, so MRC is $100 per day. Now, we see that the MRC is higher than the MRP, which means that the cost to the firm of hiring this vehicle is higher than the revenue it will bring in. Specifically, the firm will need to pay $100 to hire this vehicle, but in return the vehicle will only bring $75 of revenue to the firm. Therefore, the firm should not hire this vehicle because adding a vehicle in these circumstances will decrease the firm's profits.

Resources are the factors of production, and every resource is owned by some one. The price of a resource is very critical from the angle of a firm. A firm always tries to maximize its profits and reduce its cost. Or it tires to allocate its available resources optimally at a least cost combination. A resource which increases the cost of production is least preferred by a firm. Resource pricing is also significant from the household point of view, as it affects monetary income to households. Demand for a product stems from the utility that it provides to consumers, whereas demand for a resource depends on its productivity in creating a good or service and the value of that good or service. Because it is not resources themselves that are demanded by consumers, rather it is their outputs that are demanded, economist say that resource demand is derived from product demand. Like nearly all demand curves, resource demand slopes downward because price and quantity demanded are inversely related; as the price of a resource increases, firms demand less of that resource. This is in accordance with the law of diminishing returns

The original table and the table after the problem's specified changes (MP x 3, P x 0.5) are given below. Original: img After Changes: img The graph below shows both labor demand curves on the same axes. After a tripling of marginal product and price reduced by one half, the firm's labor demand curve shifts rightwards and rotates clockwise slightly. img

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