BUS 640 – Managerial Economics
Instructor Steve McQueen
October 17, 2011
Chapters 8 and 9 Applied Problems
2. 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.
Diminishing return is the stage of production that reflects as the number of new employees increases, the marginal product of an additional employee will eventually be less than the marginal product of the previous employee, and therefore the increase in input should be stopped (Thomas and Maurice, 2011). However, even in this stage, the employer can still hire a new person if the value of marginal product is above the wage rate. If the wage rate declines, the company should hire more people. Additionally, if the value of marginal product increases due to an increase in product price, then the company can still hire new people. That is the reason the demand for inputs is downward sloping as shown in Figure 1.
Figure 1 – Marginal Product (Google Images, 2011)
When the point of diminishing returns is reached, that means your marginal cost goes up. Marginal cost goes up because capacity goes down. However, more goods can be produced at the higher marginal cost, which means your revenue will increase at the cost of profitability. Therefore, you would not stop hiring until your net revenue peaks, and begins to decrease. This is reflected in Figure 2. One solution to the diminishing return problem is to invest in the plant and equipment, thereby increasing capacity.
Figure 2 – Marginal Product of Labor and Diminishing Returns (Google Images, 2011) Chapter 9
2. 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...