Chapter 70, Problem 1FRQ

a)

To determine

The marginal revenue product of capital of the 2^ndunit of the product capital.

Answer to Problem 1FRQ

The marginal revenue product of 2^nd unit of capital is $250.

Explanation of Solution

As the rental rate for capital is $100 per unit and the price of the product is $10, the table would represent the following data:

Q (capital)	Output	Marginal product	MRP at $10
0	0	0	0
1	30	30	300
2	55	25	250
3	70	15	150
4	78	8	80
5	85	7	70
6	89	4	40

It is calculated as:

  $\begin{array}{l}\text{MRP = Marginal product of capital }\times \text{price}\text{.}\\ \begin{array}{l} =\text{ 2}5\times \$10\hfill \\ =\$250\hfill \end{array}\end{array}$

Therefore, the marginal revenue product of 2^nd unit of capital is $250.

Economics Concept Introduction

Introduction: Marginal revenue is the earning or benefit which is obtained by using an additional unit of the product or factor of production.

Capital is an asset to the firm which generates value or advantage and this is also the factor of production for any firm.

b)

To determine

Whether the firm will employ the 2^nd unit of capital.

Explanation of Solution

Q (capital)	Output	Marginal product	MRP at $10
0	0	0	0
1	30	30	300
2	55	25	250
3	70	15	150
4	78	8	80
5	85	7	70
6	89	4	40

Yes, the firm will employ the 2^nd unit of capital because from the data in the table, it is clear that the marginal revenue product (MRP) of the capital of the 2^nd unit is $250 which is greater than the capital rental rate of $100. Therefore, the firm can generate benefits at the 2^nd unit of capital, and the firm will choose this unit.

Economics Concept Introduction

Introduction: Marginal revenue is the earning or benefit which is obtained by using an additional unit of the product or factor of production.

Capital is an asset to the firm which generates value or advantage and this is also the factor of production for any firm.

c)

To determine

The number of units of capital that firm will employ.

Explanation of Solution

Q (capital)	Output	Marginal product	MRP at $10
0	0	0	0
1	30	30	300
2	55	25	250
3	70	15	150
4	78	8	80
5	85	7	70
6	89	4	40

The firm will continue to hire capital resources until the capital rental rate exceeds the MRP. And, in this case, the firm will employ 3 units of capital where it generates more MRP as compared to the capital rental rate; after the three units, the firm’s MRP is less than its capital rental rate which can cause losses to the firm.

Therefore, the firm will hire 3 units of capital.

Economics Concept Introduction

Introduction: Marginal revenue is the earning or benefit which is obtained by using an additional unit of the product or factor of production.

Capital is an asset to the firm which generates value or advantage and this is also the factor of production for any firm.