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Economic Marginal Cost Problem

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 4 tests per hour performed on the Sunny Tune System (STS), and 6 tests per hour on a new machine, the Car Care Tower (CCT). The STS is leased for $8,000 per month, and the CCT is leased at a rate of $12,000 per month (this implies that MFCSTS = $8,000 and MFCCCT = $12,000 per month). On average, each machine is operated 25 eight-hour days per month. Labor and all other costs are fixed.

a) What is the marginal revenue product (MRP) per month for each machine? (Note: Assume a price of $15, P = MR = $15).

b) At a price of $15 per test should the company lease more machines? If yes, which (or both) machine(s). NOTE: Evaluate this question on a monthly basis since you expressed the MRP for each machine in Part (a) in monthly terms.

Solution Preview

a) What is the marginal revenue product (MRP) per month for each machine?  (Note:  Assume a price of $15, P = MR = $15).

Each month, the machines will operate 8*25 = 200 hours.
Then the marginal product of STS is 4*200 = ...

Solution Summary

Marginal Cost Problem is assessed.