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Group C Activity

This document discusses production and compensation policies for a business. It includes: 1. An analysis of production inputs for a business, determining they exhibit decreasing marginal rates of technical substitution based on production tables. It also calculates marginal products and revenues for different input combinations. 2. An analysis of a car salesperson's marginal revenue product based on their average weekly sales and profit per vehicle. It determines the salesperson is not profitable for the company after factoring in their salary and benefits costs compared to their marginal revenue contribution. 3. Recommends changing an input combination for the business because another combination allows higher output at the same cost.

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Gerard Andrei B. Deinla
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216 views3 pages

Group C Activity

This document discusses production and compensation policies for a business. It includes: 1. An analysis of production inputs for a business, determining they exhibit decreasing marginal rates of technical substitution based on production tables. It also calculates marginal products and revenues for different input combinations. 2. An analysis of a car salesperson's marginal revenue product based on their average weekly sales and profit per vehicle. It determines the salesperson is not profitable for the company after factoring in their salary and benefits costs compared to their marginal revenue contribution. 3. Recommends changing an input combination for the business because another combination allows higher output at the same cost.

Uploaded by

Gerard Andrei B. Deinla
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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GROUP C Activity:

Subject
Topic

:Business and Economic Analysis


:Production and Compensation Policy

1. The following production table gives estimates of the maximum amounts of output
possible with different combinations of two input factors, X and Y. (Assume that these
are just illustrative points on a spectrum of continuous input combinations).
Units of Y
Used
5
4
3
2
1

Estimated Output Per Day


210
188
162
130
94
1

305
360
272
324
234
282
188
234
130
162
2
3
Units of X Used

421
376
324
272
188
4

470
421
360
305
210
5

A. Do the two inputs exhibit characteristics of constant, increasing, or decreasing


marginal rate of technical substitution? How do you know?
The two inputs exhibit the characteristic of a decreasing marginal rate of technical
substitution. We knew this because decreasing marginal rate of technical
substitution has a diminishing slope of the production isoquants which results from
increasingly substituting one input for another. Likewise, it could also be known if X
and Y are held constant in the input-output matrix at the same time noting its
decline in the relative marginal product of the other input as the usage level
increases.
B. Assuming that output sells for $3 per unit, complete the following tables:
X Fixed at 2 Units
Units of Y Used Total of Product
Marginal
Y
Product of Y
1
2
3
4
5

130
188
234
272
305

130
58
46
38
33

Average
Product of Y
130
94
78
68
61

Marginal
Revenue
Product of Y
$390
174
138
114
99

Units of X
Used
1
2
3
4
5

Y Fixed at 3 Units
Total of Product
Marginal
X
Product of X
162
234
282
324
360

162
72
48
42
36

Average
Product of X
168
117
94
81
72

Marginal
Revenue
Product of X
$486
216
144
126
108

C. Assume that the quantity of X is fixed at 2 units. If output sells $3 and the cost of Y is
$120 per day, how many units of Y will be employed?
3 units of Y will be employed (Y=3). The marginal value of unit 1,2, and 3 is greater
than their marginal cost and since the marginal value of unit 4 is $6 less than its
cost, then the company would employ no more than 3 units of Y.
D. Assume that the company is currently producing 162 units of output per day using 1
unit of X and 3 units of Y. The daily cost per unit of X is $120 and that of Y is also $120.
Would you recommend a change in the present input combination? Why or Why not?
Yes, we would recommend a change in the present input combination because the
company can produce 188 units at the same cost with 2 units of each output.
2. To better serve customers interested in buying cars over the Internet, Smart Motors,
Inc., hired Nora Jones to respond to customer inquiries, offer quotes, and write orders for
leads generated by the companys Web site. During the last year, Jones averaged 1.5
vehicles sales per week. On average, these vehicles sold for a retail price of $25,000 and
brought the dealership a profit contribution of $1,000 each.
A. Estimate Jones annual (50 workweek) marginal revenue product.
Marginal Revenue Product = Car sales per year * Profit contribution per unit
= (1.5 * 50) * ($1,000)
= $75,000
B. Jones earns a base salary of $60,000 per year, amd Smart Motors pays an additional 28
percent of this base salary in taxes and various fringe benefits. Is Jones a profitable
employee?
No, Jones is not a profitable employee because the company spends $76,800
annually for Jones compensation. This is computed as follows:
Jones compensation = ($60,000 * 1.28)

= $ 76, 800
If this is compared to Jones annual marginal revenue product of $75,000, it is
higher which means the company does not gain profit out of Jones employment.

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