Bus 640

BUS 640: Managerial Economics

Chapter 3: Applied Problems 2 and 4

2) Appalachian Coal Mining believes that it can increase labor productivity and, therefore, net revenue by reducing air pollution in its mines. It estimates that the marginal cost function for reducing pollution by installing additional capital equipment is MC = 40P where P represents a reduction of one unit of pollution in the mines. It also feels that for every unit of pollution reduction the marginal increase in revenue (MR) is MR = 1,000 10P How much pollution reduction should Appalachian Coal Mining undertake? Marginal revenue will be equal to marginal cost, which Maurice and Thomas (2011) contends produces optimal activity level, if Appalachian Coal Mining undertook 20 units of pollution reduction. Units MC MR 1 40 990 2 80 980 3 120 970 4 160 960 5 200 950 10 400 900 15 600 850 20 800 800 4) Twenty-first Century Electronics has discovered a theft problem at its warehouse and has decided to hire security guards. The firm wants to hire the optimal number of security guards. The following show how the number of security guards affects the number of radios stolen per week. Number of security guards, Number of stolen radios per wk 0 50 (0 ($1250 1 200 30 750 2 400 20 500 3 600 14 350 4 800 8 200 5 1000) 6 150) a. If each security guard is paid $200 a week and the cost of a stolen radio is $25, how many security guards should the firm hire? Optimal level of activity is described by Thomas and Maurice (2011) as, the level of activity that maximizes net benefit (p. 91). Therefore, to determine how many security guards should be hired, the firm should conduct a marginal analysis and determine when the net benefit is maximized. This maximization is determined when the marginal benefit of hiring security guards equals the marginal cost of hiring security guards (p. 97). 16 radios = $400 = 2 guards b. If the cost of a stolen radio is $25, what is the most the firm would be willing to pay to hire...