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-cost combination of X and Y but could increase its profits by employing less of both X and Y.

Question

Quizplus · Accepted Answer

The MRP of each resource is its marginal product multiplied by the product price. Here, the MRP of X is $100 and the MRP of Y is $60.  The cost of adding one more unit of X is $50 and the cost of adding one more unit of Y is $20.

Given that the MRPs are greater than the costs, the manufacturer can increase its profits by hiring more of both X and Y. This means the manufacturer is not yet at the point of diminishing returns for either resource, and increasing the quantity of both resources will lead to higher output and higher profits. Therefore, option A is correct.

Assume That an Appliance Manufacturer Is Employing Variable Resources X