Your boss is trying to decide whether to buy out a rival company and asks for your advice.The boss says that she will buy the rival if there is evidence that the rival is operating inefficiently.(Your company will then improve its efficiency and increase profits. )She will not buy the rival if there is evidence that the rival is already operating efficiently.Your boss gives you the following data on the rival's operations: The average product of labour is 4,the marginal product of the last worker hired is 10,the wage is $20,and the price of output is $5.Based on this information,you should tell your boss to buy the rival.

Question

Quizplus · Accepted Answer

Based on the given information, we can calculate the rival's marginal revenue product (MRP) as follows:

MRP = Price x Marginal Product of Labor 
MRP = $5 x 10 
MRP = $50

The rival's cost of hiring an additional worker (the wage) is $20, which means that the rival is making a profit of $30 ($50 - $20) for each additional worker hired. This indicates that the rival is operating efficiently, since it is earning a profit on each unit of labor. Therefore, your boss should buy the rival, since her plan is to acquire an inefficient firm and improve its efficiency to increase profits.

Your Boss Is Trying to Decide Whether to Buy Out