2. The First National Bank Received 3 000 Inquiries Following The Latest Advertisement Describing Its 30-month Ira Accounts In The Boston World A Local Newspaper. The Most Recent Ad In A Similar Advertising Campaign In Massachusetts Business A Regional Bu

C. Assume that the quantity of X is fixed at 2 units. If output sells for $3 and the cost of Y is $120 per day, how many units of Y will be employed?

D. Assume that the company is currently producing 162 units of output per day using 1 unit of X and 3 units of Y. The daily cost per unit of X is $120 and that of Y is also $120. Would you recommend a change in the present input combination? Why or why not?

E. What is the nature of the returns to scale for this production system if the optimal input combination requires that X = Y?

P7.2 Production Function Concepts. Indicate whether each of the following statements is true or false. Explain your answers.

A. Decreasing returns to scale and increasing average costs are indicated when e0 < 1.

B. If the marginal product of capital falls as capital usage grows, the returns to capital are decreasing.

C. L-shaped isoquants describe production systems in which inputs are perfect substitutes.

D. Marginal revenue product measures the profit earned through expanding input usage.

E. The marginal rate of technical substitution will be affected by a given percentage increase in the marginal productivity of all inputs.

P7.3 Compensation Policy. "Pay for performance" means that employee compensation closely reflects the amount of value derived from each employee's effort. In economic terms, the value derived from employee effort is measured by net marginal revenue product. It is the amount of profit generated by the employee, before accounting for employment costs. Holding all else equal, indicate whether each of the following factors would be responsible for increasing or decreasing the amount of money available for employee merit-based pay.

A. Government mandates for employer-provided health insurance

B. Rising productivity due to better worker training

C. Rising employer sales due to falling imports

D. Falling prices for industry output

E. Rising prevalence of uniform employee stock options

P7.4 Returns to Scale. Determine whether the following production functions exhibit constant, increasing, or decreasing returns to scale.

P7.5 Optimal Compensation Policy. Cafe-Nervosa.com, based in Seattle, Washington, is a rapidly growing family business that offers a line of distinctive coffee products to local and regional coffee shops. Founder and president Frasier Crane is reviewing the company's sales force compensation plan. Currently, the company pays its three experienced sales staff members a salary based on years of service, past contributions to the company, and so on. Niles Crane, a new sales trainee and brother of Fraiser Crane, is paid a more modest salary. Monthly sales and salary data for each employee are as follows:

Sales Staff Average Monthly Sales Monthly Salary

Roz Doyle



Daphne Moon



Martin Crane



Niles Crane



Niles Crane has shown great promise during the past year, and Fraiser Crane believes that a substantial raise is clearly justified. At the same time, some adjustment to the compensation paid to other sales personnel also seems appropriate. Fraiser Crane is considering changing from the current compensation plan to one based on a 5% commission. He sees such a plan as being more fair to the parties involved and believes it would also provide strong incentives for needed market expansion.

A. Calculate Cafe-Nervosa.com's salary expense for each employee expressed as a percentage of the monthly sales generated by that individual.

B. Calculate monthly income for each employee under a 5% of monthly sales commission-based system.

C. Will a commission-based plan result in efficient relative salaries, efficient salary levels, or both?

P7.6 Optimal Input Mix. The First National Bank received 3,000 inquiries following the latest advertisement describing its 30-month IRA accounts in the Boston World, a local newspaper. The most recent ad in a similar advertising campaign in Massachusetts Business, a regional business magazine, generated 1,000 inquiries. Each newspaper ad costs $500, whereas each magazine ad costs $125.

A. Assuming that additional ads would generate similar response rates, is the bank running an optimal mix of newspaper and magazine ads? Why or why not?

B. Holding all else equal, how many inquiries must a newspaper ad attract for the current advertising mix to be optimal?

P7.7 Optimal Input Level. The Route 66 Truck Stop, Inc., sells gasoline to both self-service and full-service customers. Those who pump their own gas benefit from the lower self-service price of $1.50 per gallon. Full-service customers enjoy the service of an attendant, but they pay a higher price of $1.60 per gallon. The company has observed the following relation between the number of attendants employed per day and full-service output:

Route 66 Truck Stop, Inc.

Number of Attendants per Day

Full-Service Output (gallons)

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