Consider a small landscaping company run by mr. viemeister. he is considering increasing his firm’s capacity. if he adds one more worker, the firm’s total monthly revenue will increase from $50,000 to $58,000. if he adds one more tractor, monthly revenue will increase from $50,000 to $62,000. each additional worker costs $4,000 per month, while an additional tractor would also cost $4,000 per month.
a. what is the marginal product of labor? the marginal product of capital?
mpl = $¬
mpk = $¬
b. what is the ratio of the marginal product of labor to the price of labor (mpl / pl )?
mpl / pl = ¬
what is the ratio of the marginal product of capital to the price of capital (mpk/ pk )?
mpk / pk = ¬
c. is the firm using the least-costly combination of inputs?
1. yes, because mpk/pk = mpl/pl.
2. no, because mpk/pk > mpl/pl.
d. does adding an additional worker or adding an additional tractor yield a larger increase in total revenue for each dollar spent?
1. revenue is increased more by spending money on an additional worker.
2. revenue is increased more by spending money on an additional tractor.
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answer: a. stagflation
explaining: stagflation was developed during the 1960s and 1970s. in economics, stagflation, a portmanteau of stagnation and inflation, is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high. it raises a dilemma for economic policy, since actions designed to lower inflation may exacerbate unemployment, and vice versa. the term is generally attributed to iain macleod, a british conservative party politician who became chancellor of the exchequer in 1970; macleod coined the phrase in a speech to parliament in 1965.