Financial Management Paper 34

A

C

A

B

D

B

C

Correct answer: (C)
Marginal product is the increase in the total output resulting from a 1-unit increase in an input. In this case the increase of 1 worker from 10 to 11 causes an increase in the total output equal to 5 (25 – 20 = 5 units).

Correct answer: (A)
The marginal revenue of adding 1 more worker to a team of 11 equals to the change in the total revenue from 25 units × $49 = $1,225 to 28 units × $47.50 = $1,330. Thus, the marginal revenue is $1,330 – $1,225 = $105. The marginal revenue per unit added from adding 1 more worker is $35 ($105 ÷ (28 – 25) = $35).

Correct answer: (C)
Marginal revenue product is the change in total revenue from using 1 more unit of a resource. In this example, not only the marginal product is declining, but the average selling price is also declining. Therefore, both factors will affect marginal revenue product. From 11 workers to 12 workers, the average selling price decreases from $49.00 to $47.50. This is not the incremental selling price but the average selling price. To calculate the change in total revenue requires multiplying the total number of product units by the average selling price (for both levels) and then calculating the difference. Therefore, total revenue changes from 25 units × $49 = $1,225 to 28 units × $47.50 = $1,330. Thus, the marginal revenue product is $1,330 – $1,225 = $105.