Description
Marginal Revenue Product
Marginal revenue product is defined as the change in total revenue that results from the employment of an additional unit of a resource. A producer wishes to determine how the addition of pounds of plastic will affect its MRP and profits. See the table below, and answer each of the questions.
Pounds of plastic (quantity of resource) | Number of assemblies (total product) | Price of assemblies ($) |
0 | 0 | - |
1 | 15 | 13 |
2 | 30 | 11 |
3 | 40 | 9 |
4 | 55 | 7 |
5 | 58 | 5 |
a. The marginal product of the 3rd pound of plastic is ________.
b. The marginal revenue product of the 3rd pound of plastic is ______.
c. The price of plastic is $135 per pound. To maximize profit, the producer should produce
__________________.
d. The price of plastic is $135 per pound. To maximize profit, the producer should buy and use:
________________.
Explanation & Answer
(a) Calculate marginal product of 3rd pound of plastic -MP = Total product of 3 pounds of plastic - Total product of 2 pounds of plastic = 40 assemblies - 30 assemblies = 10 assembliesThus, the marginal product of the 3rd pound of plastic is 10 assemblies.(b) Calculate marginal revenue product of the 3rd pound of plastic -First, we have to calculate the total revenue when 2 pounds of plastic is used -Total Revenue (TR2) = Total product of 2 pounds of plastic * Price = 30 assemblies * $11/assembly = $330Now, we will ca...