3. A delivery company is considering adding another vehicle to its delivery flee

Question

3. A delivery company is considering adding another vehicle to its delivery fleet, all the vehicles of which are rented for $100 per day. Assume that the additional vehicle would be capable of delivering 1500 packages per day and that each package that is delivered brings in ten cents ($.10) in revenue. Also assume that adding the delivery vehicle would not affect any other costs.

a. What is the MRP? What is the MRC? Should the firm add this delivery vehicle?

b. Now suppose that the cost of renting a vehicle doubles to $200 per day. What are the MRP and MRC? Should the firm add a delivery vehicle under these circumstances?

c. Next suppose that the cost of renting a vehicle falls back down to $100 per day but, due to extremely congested freeways, an additional vehicle would only be able to deliver 750 packages per day. What are the MRP and MRC in this situation? Would adding a vehicle under these circumstances increase the firm

Explanation / Answer

Hi, if you like my answer please rate me lifesaver first. Thanks MRP = Marginal Revenue Product = 1500 * 0.1 = 150 ( Revenue added by increasing by 1 vehicle) MRC = Marginal Revenue Cost= 100 ( Additional Rent to be paid by increasing by 1 vehicle) Since MRP > MRC (Firm is earning more than it is paying by 50), it should add the vehicle. MRP remains the same, MRC = 200. No, the firm still should not add the vehicle. It has to pay now extra 50 bucks (200-150) MRP = 750 * 0.1 =$75, MRC = 100. Since MRP

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