Answer to Question #108826 in Economics of Enterprise for dipan

Question

Assume that you have to determine the optimal amount of workers (L) that need to be hired in a
factory. The Marginal Benefit to the factory is approximately given by the expression:
MB = 100,000 - L.
The Marginal Cost to the firm is approximately given by the expression:
MC = 10,000 + L
2
.
a) Explain in your own words the Marginal Approach. How do you make a decision using this
approach?
b) Why the model has the Marginal Benefit as decreasing?
c) Why the model has the Marginal Cost increasing at an increasing rate?
d) Calculate the optimal of Labour using the Marginal Approach.

e) Make a well labelled diagram that illustrates your solution.
f) What can be some of the limitations of the Marginal Approach? What other solutions or
approaches can you use to determine how many workers you need to hire?

Answer 1

a) According to the Marginal Approach we compare the additional benefits of an activity to the additional costs incurred by that same activity.

The profit is maximized when marginal benefit equals marginal cost.

b) The model has the Marginal Benefit as decreasing because marginal benefit is the maximum amount of money a consumer is willing to pay for an additional good or service. The consumer's satisfaction tends to decrease as consumption increases. 

c) The model has the Marginal Cost increasing at an increasing rate because marginal cost, which is directly felt by the producer, is the change in cost when an additional unit of a good or service is produced. But the more labour is used without any change in other inputs the less optimized production becomes.

d) The optimal amount of Labour using the Marginal Approach is:

$MB = MC,$

$100,000 - L = 10,000 + L,$

L = 45,000 workers.

e) The downward-sloping MB curve will inrersect the upward-sloping MC curve in the profit-maximizing point of L = 45,000 workers.

f) The limitations of marginal approach are: the classification of total costs into fixed and variable cost is difficult, fixed costs are totally eliminated for the valuation of inventory of finished and semi-finished goods, so such elimination affects the profitability adversely. Total cost-total revenue analysis also can be used.