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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 Marginal Revenue Product (MRP) is used to assess the additional revenue a firm expects to earn by employing additional inputs. A famous tennis star is paid more because of the high additional revenue expected from his appearance in the commercial. An executive is paid to leave if their presence leads to decreases in the company's revenue. Larger aircraft's higher pricing can be attributed to the higher expected revenue from more passengers despite similar manufacturing costs.

Step by step solution

01

Defining Marginal Revenue Product(MRP)

Marginal Revenue Product (MRP) can be defined as the additional revenue that a firm generates by employing an additional unit of input, keeping all other inputs constant. It's calculated by multiplying the marginal physical product of the input by the marginal revenue generated from the additional output sold.
02

MRP and Tennis Star's Salary

A famous tennis star is given a high salary because the additional revenue that the firm expects to gain (through increased product sales due to the star's promotion) from using the tennis star in the commercial is significantly high. The actor who plays his doubles partner is paid less because his presence in the commercial isn't expected to bring in as much additional revenue.
03

MRP and Business Executive's Salary

If a business executive is paid not to work, it means the marginal revenue product of the executive is considered to be negative by the firm. In simpler terms, their presence, decisions or actions are expected to reduce the company's overall revenue.
04

MRP and Aircraft Pricing

The jumbo jet may be priced higher than the smaller jet because it's expected to generate more revenue (by accommodating more passengers) despite having similar manufacturing costs. Simply put, the per unit marginal revenue product is higher for the jumbo jet since it can carry more passengers.

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Most popular questions from this chapter

Assume that workers whose incomes are less than \(\$ 10,000\) currently pay no federal income taxes. Suppose a new government program guarantees each worker \(\$ 5000,\) whether or not he or she earns any in come. For all earned income up to \(\$ 10,000\), the worker must pay a 50 -percent tax. Draw the budget line facing the worker under this new program. How is the program likely to affect the labor supply curve of workers?

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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 \(L=20\) w. What is the equilibrium wage rate and quantity of labor hired? What is the economic rent earned by workers?

Suppose that the wage rate is \(\$ 16\) per hour and the price of the product is \(\$ 2 .\) Values for output and labor are in units per hour. $$\begin{array}{cc}9 & 1 \\\\\hline 0 & 0 \\\20 & 1 \\ 35 & 2 \\\47 & 3 \\\57 & 4 \\\65 & 5 \\\70 & 6\end{array}$$ a. Find the profit-maximizing quantity of labor. b. Suppose that the price of the product remains at \(\$ 2\) but that the wage rate increases to \(\$ 21 .\) Find the new profit-maximizing level of \(L\) c. Suppose that the price of the product increases to \(\$ 3\) and the wage remains at \(\$ 16\) per hour. Find the new profit-maximizing \(L\) d. Suppose that the price of the product remains at \(\$ 2\) and the wage at \(\$ 16,\) but that there is a technological breakthrough that increases output by 25 percent for any given level of labor. Find the new profit-maximizing L.
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