2. Smokey\'s Garage, Inc., provides routine auto diagnostics for customers in th

Question

2. Smokey's Garage, Inc., provides routine auto diagnostics for customers in the Atlanta, Georgia, metropolitan area. Tests are supervised by skilled mechanics using equipment produced by two leading competitors in the auto test equipment industry. Records for the current year show an average of 5 tests per hour performed on the Sunny Tune System (STS), and 9 tests per hour on a new machine, the Car Care Tower (CCT). The STS is leased for $25,000 per month, and the CCT is leased at a rate of $45,000 per month. On average, each machine is operated 25 eight-hour days per month. Labor and all other costs are fixed, and tests are conducted at a price of $26 each.

A) Does company usage reflect an optimal mix of testing equipment?

B) Determine the marginal revenue products for the STS and for the CCT employed by Smokey’s Garage, Inc.

C) At a price of $26 per test should the company lease more machines?

Explanation / Answer

1.

STS per test cost= Total Leased amount/numner of test per month

=25000/(5*25*8)=25

CCT per test cost=450000/(9*25*8)=25

Since per machine per test cost are same so firm is using optimal mix by employing 1 unit of each machine.

2.

Marginal Revenue product for STS=dR/dQ=P=$26 per unit

MRP for CCT is 26 per unit of machine

3. since marginal revenue of product per test is higher than marginal cost per test, so firm can lease machine for more test which will increase its revenue.

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