9781118041581

Summary 217

person.) The “next” three individuals go to large accounts (marginal profit is $50,000).

The “last” two salespeople serve new accounts (marginal profit is $40,000). By assign-

ing eight and ten salespeople to large and new accounts, respectively, the firm earns a

total operating profit of $950,000 $690,000 $1,640,000.

New accounts have a lower average profit per salesperson but claim a majority of the

sales force. The intuitive explanation is that these accounts offer better profit opportu-

nities at the margin. Once five salespeople have been assigned to maintain the large

accounts, there is relatively little opportunity to increase profit in this area. In contrast,

there is a relatively steady marginal profit to be earned in new accounts. Thus, this is

where the majority of the salespeople should be placed.

SUMMARY

Decision-Making Principles

1. Production is the process of turning inputs into outputs.


2. To maximize profit, the firm should increase usage of a variable input up
   to the point where the input’s marginal cost equals its marginal revenue
   product.


3. To minimize the cost of producing a particular amount of output, the
   firm should choose an input mix such that the ratio of the marginal
   product to the input’s cost is the same across all inputs.


4. In allocating an input among multiple plants, the firm maximizes total
   output when marginal products are equal across facilities.


5. In allocating an input among multiple products, the firm maximizes
   total profit when marginal profits per unit input are equal across
   products.

Nuts and Bolts

1. The production function indicates the maximum amount of output the
   firm can produce for any combination of inputs.


2. The short run is a period of time in which the amount of one or more of
   the firm’s inputs is fixed, that is, cannot be varied.
   a. Marginal product (MP) is the additional output produced by an
   additional unit of an input, all other inputs held constant.
   b. The law of diminishing returns states that, as units of one input are
   added (with all other inputs held constant), a point will be reached
   where the resulting additions to output will begin to decrease; that is,
   marginal product will decline.

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