Suppose Ramone’s Drones maximizes profits by making local deliveries using small drones and centrally located pilots to control the drones remotely. In the markets for pilots and drones, neither side has any market power – that is, they are both competitive markets. A) If drones cost Ramone
300 per day, what is the marginal revenue product (MRP) of the pilots?
Suppose Ramone’s Drones maximizes profits by making local deliveries using small drones and centrally located pilots to control the drones remotely. In the markets for pilots and drones, neither side has any market power – that is, they are both competitive markets. A) If drones cost Ramone
300 per day, what is the marginal revenue product (MRP) of the pilots?
The Correct Answer and Explanation is :
Answer:
If drones cost Ramone $300 per day, and the company is maximizing profits in competitive input and output markets, the marginal revenue product (MRP) of the pilots must also be $300 per day.
Explanation
In competitive markets, profit-maximizing firms hire inputs (like labor or capital) up to the point where the cost of the input equals its marginal revenue product (MRP). The MRP represents the additional revenue a firm earns by employing one more unit of an input, holding all other inputs constant.
In this case, Ramone’s Drones uses pilots and drones together to make deliveries. The production technology seems to be such that each pilot operates one drone. If each drone costs $300 per day, then the firm will only employ a pilot to operate a drone if the value generated by that pilot (the MRP) is at least $300. If the pilot-drone pair generates less than $300 in revenue, the firm would incur a loss and choose not to employ that combination. If the MRP were more than $300, Ramone could increase profits by employing more pilot-drone pairs.
Since the markets for both pilots and drones are competitive, Ramone is a price-taker and cannot influence input prices. Therefore, profit maximization requires that the cost of hiring a pilot (in terms of what the pilot contributes to output and revenue) equals the cost of deploying the drone they operate. Under the assumption that pilots and drones are used in fixed proportion (e.g., one pilot per drone), the MRP of a pilot must match the cost of operating a drone to avoid inefficiency or excess costs.
So, when drones cost $300/day, and the firm is maximizing profits in a competitive setting, the marginal revenue product of a pilot must also be $300/day, ensuring that the firm is allocating resources efficiently.
