Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 14: Problem 3

Using your knowledge of marginal revenue product, explain the following: a. 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 \(\$ 500\). b. The president of an ailing savings and loan is paid not to stay in his job for the last two years of his contract. c. 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
The different examples display how marginal revenue product plays a role in decision making. The tennis star and actor's pay vary due to the expected increase in attention and revenue brought by the star. The savings and loan president's contract termination is due to the expectation that a replacement could provide greater revenue. The larger aircraft is priced higher because, despite having the same manufacturing cost as the smaller model, it can carry more passengers and thus generate higher potential revenues.

Step by step solution

01

Explain Tennis Star's and Actor's Pay

The tennis star is paid $200,000 compared to the $500 paid to the actor because of their differing marginal revenue product. The tennis star brings a substantial amount of additional attention and recognition to the commercial, which is likely to increase its effectiveness and drive more revenue for the company. Hence, the value added by the tennis star's participation (marginal revenue product) is likely significantly higher than that of the actor.
02

Explain the President's Payout

The president of an ailing savings and loan firm is paid not to complete the last two years of his contract because his replacement is expected to bring in greater marginal revenue than he could. The firm, therefore, is willing to pay to change leadership with the expectation that the new president will increase revenue beyond the cost of the payout.
03

Discuss Aircraft Pricing

Despite both the 400-passenger and 250-passenger jumbo jets costing the same amount to manufacture, the 400-seater is priced higher because it commands a greater marginal revenue product. The larger aircraft can carry more passengers per flight, potentially leading to greater revenues. Airlines are therefore likely to pay more for the larger plane due to the increased revenue-earning potential despite the identical manufacturing cost.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Suppose that a firm's production function is given by \(Q=12 L-L^{2},\) for \(L=0\) to \(6,\) where \(L\) is labor input per day and \(Q\) is output per day. Derive and draw the firm's demand for labor curve if the firm's output sells for \(\$ 10\) in a competitive market. How many workers will the firm hire when the wage rate is \(\$ 30\) per day? \(\$ 60\) per day? (Hint: The marginal product of labor is \(12-2 L\).)

The demands for the factors of production listed below have increased. What can you conclude about changes in the demands for the related consumer goods? If demands for the consumer goods remain unchanged, what other explanation is there for an increase in derived demands for these items? a. Computer memory chips b. Jet fuel for passenger planes c. Paper used for newsprint A. Aluminum used for beverage cans

A firm uses a single input, labor, to produce output \(q\) according to the production function \(q=8 \sqrt{L}\). The commodity sells for \(\$ 150\) per unit and the wage rate is \(\$ 75\) per hour. a. Find the profit-maximizing quantity of \(L\) b. Find the profit-maximizing quantity of \(q\) c. What is the maximum profit? d. Suppose now that the firm is taxed \(\$ 30\) per unit of output and that the wage rate is subsidized at a rate of \(\$ 15\) 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. e. Now suppose that the firm is required to pay a 20 percent tax on its profits. Find the new profit-maximizing levels of \(L, q,\) and profit.

The only legal employer of military soldiers in the United States is the federal government. If the government uses its knowledge of its monopsonistic position, what criteria will it employ when determining how many soldiers to recruit? What happens if a mandatory draft is implemented?

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

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free