Ramone’s Drones Inc. makes local deliveries using small drones. Ramone is looking to hire an additional pilot to help with increased delivery needs. He currently brings in $8500 per month, but with the new pilot, thinks he’ll be able to increase his revenue to $9750 per month.
Required:
What is the monthly marginal revenue from hiring the additional pilot, which is referred to as the marginal revenue product of labor or MRPL?
The Correct Answer and Explanation is :
The correct answer is: $1,250 per month
To calculate the monthly marginal revenue product of labor (MRPL) from hiring an additional pilot for Ramone’s Drones Inc., we first need to understand what MRPL represents. It measures the additional revenue generated from employing one more unit of labor—in this case, one more pilot.
Calculation
- Current Revenue: $8,500 per month
- Projected Revenue with New Pilot: $9,750 per month
Marginal Revenue Product of Labor (MRPL):
[
\text{MRPL} = \text{Projected Revenue} – \text{Current Revenue}
]
[
\text{MRPL} = 9,750 – 8,500 = 1,250
]
Thus, the marginal revenue product of labor (MRPL) from hiring the additional pilot is $1,250 per month.
Explanation
The concept of MRPL is essential in understanding the relationship between labor and revenue generation in a business context. In Ramone’s case, hiring an additional pilot not only increases operational capacity but also boosts revenue potential. The MRPL of $1,250 signifies that employing this new pilot would directly contribute an additional $1,250 in revenue each month.
This figure is crucial for decision-making. Ramone can assess whether the cost of hiring and employing the pilot aligns with the expected increase in revenue. If the pilot’s wage and associated expenses (such as training, insurance, and benefits) are lower than the MRPL, it would be financially beneficial to proceed with the hire.
Additionally, understanding MRPL helps Ramone evaluate the efficiency and productivity of his workforce. If the MRPL exceeds the cost of hiring the additional pilot, it indicates that the labor addition is productive and profitable. In contrast, if it were lower, Ramone might reconsider expanding his workforce or explore other operational efficiencies before proceeding. Therefore, the MRPL serves as a critical metric for strategic business growth and resource allocation in Ramone’s Drones Inc.