Managerial Economics Applied Problems Week 4 Bus 640

Applied Problems Week 4

Chapter 8: Applied Problem 2 – Diminishing Returns

At a management luncheon, two managers were overheard arguing about the following statement: “A manager should never hire another worker if the new person causes diminishing returns.” Is this statement correct? If so, why? If not, explain why not.

Answer: In the textbook Managerial Economics Thomas et al (2011) said, “...managers do in fact employ variable inputs beyond the point of diminishing returns but not to the point of negative marginal product (page 297).” Thus a manager should hire another employee, if another is needed, but no further than negative marginal product. As such, the statement made be the manager, “A manager should never hire another worker if the new person causes diminishing returns,” is not true.

Chapter 9: Applied Problem 2 – Largo Publishing House

The Largo Publishing House uses 400 printers and 200 printing presses to produce books. A printer’s wage rate is $20, and the price of a printing press is $5,000. The last printer added 20 books to total output, while the last press added 1,000 books to total output. Is the publishing house making the optimal input choice? Why or why not? If not, how should the manager of Largo Publishing House adjust input usage?

Answer: The Largo Publishing House did not make the best input choice. Another printer employee would be able to produce one book per dollar, whereas it costs one dollar per each 0.2 books printed by a printing press.

Printer employees: 20 books/$20 = 1 book per dollar

Printing press: 1000 books/$5000 = 0.20 books per dollar

Instead of adding another printing press the company should have hired an additional printer employee. The company could have produced more output with another printer employee rather than adding another printing press. The Largo Publishing House should invest money into the input that produces more per dollar invested, and avoid investing money into input that...