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Markets for factor inputs

1. Using your knowledge of marginal revenue product, explain the following:

a. A star is paid $200,000 for appearing in a 30-second television commercial. The actor who plays his doubles partner is paid $500.

b. A president of a company is paid not to stay in his job for the last two years of his contract.

c. A jumbo jet carrying 400 passengers is priced higher than a 250-passenger model, even though both aircrafts cost the same to manufacture.

2. The only legal employer of military soldiers in the US is the federal government. If the government uses its knowledge of its monopolistic position, what criteria will it employ when determining how many soldiers to recruit? What happens if a mandatory draft is implemented?

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Please see the attached file.

Answers:
1-a) From the given statement, it is understood that the doubles partner is paid less when compared with the star. The reason behind is that, according to the concept of marginal revenue productivity, larger the number of workers, the smaller the output added to the total output by the last worker. i.e the marginal productivity of the worker declines.
As we know that, MRP = MP * Price, & the MP of the doubles partner might declines due to the increase in their number of doubles partner. Thus the ...

Solution Summary

The solution answers the question(s) below. The markets for factor inputs are determined.

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