Final answer:
i. The marginal product curve of a firm is typically U-shaped due to the law of diminishing marginal returns. ii. Knowledge about the shape of the marginal product curve is relevant to a manager for making informed decisions about labor employment. b) Elasticities for business travel are lower than leisure travel due to business travelers having less flexibility in their travel choices. Prices set to maximize profit or sales revenue should have a price elasticity of -1. To maximize revenue, prices should be increased for goods with inelastic demand and decreased for goods with elastic demand.
Step-by-step explanation:
i. How will the marginal product curve of the firm look like? Explain the shape of the curve.
The marginal product curve of a firm represents the relationship between the level of labor employed and the marginal product of labor. It is typically U-shaped, meaning it starts off steeply sloping upwards, reaches a peak, and then gradually slopes downwards. This shape occurs due to the law of diminishing marginal returns, which states that as more units of a variable input (in this case, labor) are added to a fixed input (the plant size), the marginal product of the variable input eventually decreases.
ii. How relevant is knowledge about the shape of the curve to the manager?
Knowledge about the shape of the marginal product curve is highly relevant to a manager. Understanding the shape of the curve helps the manager make informed decisions regarding the optimal level of labor to employ. The manager can determine the point at which the marginal product of labor starts to decrease, indicating diminishing returns. Operating at this point is economically efficient, as it maximizes productivity and minimizes costs.
b) The estimated own price elasticities for rail travel are as follows: first class (-0.5), Business (-0.2), Personal (-1.0) and Leisure (-1.4).
i. Suggest reasons why elasticities for business travel are lower than that for leisure travel.
One possible reason for the lower elasticities of business travel compared to leisure travel is the inelastic demand associated with business-related travel. Business travelers may have less flexibility in their travel choices due to the nature of their work obligations. In contrast, leisure travelers often have more freedom to adjust their travel plans or choose alternative modes of transportation.
ii. Which of the existing prices are at levels set either to maximize profit or sales revenue? Explain.
In order to determine which prices are set to maximize profit or sales revenue, we need to consider the concept of price elasticity of demand. Price elasticity measures the responsiveness of quantity demanded to changes in price. Assuming the goal is to maximize profit, the firm should set prices where the price elasticity of demand is equal to -1. This is because at this point, a small change in price will result in an equal percentage change in quantity demanded, maximizing total revenue.
iii. Which prices should be increased, and which should be lowered to maximize revenue? Explain.
To maximize revenue, the firm should increase the prices of goods with inelastic demand (low price elasticity) and decrease the prices of goods with elastic demand (high price elasticity). Goods with inelastic demand can tolerate price increases without experiencing significant decreases in quantity demanded, resulting in higher total revenue. On the other hand, goods with elastic demand are more sensitive to price changes, so lowering prices can attract more customers and increase total revenue.