Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 1

Sally Greenhorn has just graduated from a noted business school but does not have the foggiest idea about her new job with a firm that sells shrink-wrapped dog biscuits. She has been given responsibility for a new line of turkey-flavored biscuits and must decide how many to produce. She opts for the following strategy: (1) Begin by hiring one worker and one dog biscuit machine; (2) if the revenues from this pilot project exceed its costs, add a second worker and machine; (3) if the additional revenues generated from the second worker/machine combination exceed what these cost, add a third; and (4) stop this process when adding a worker/machine combination brings less in revenues than it costs. Answer the following questions about SG's approach:
a. Is SG using a marginal approach to her hiring of inputs?
b. Does the approach adopted by SG also imply that she is following a MR - MC rule for finding a profit-maximizing output?
c. SG s distinguished professor of marketing examines her procedures and suggests she is mistaken in her approach. He insists that she should instead measure the profit on each new worker/machine combination employed and stop adding new output as soon as the last one added earns a lower profit than the previous one. How would you evaluate his distinguished advice?