Author Question: Suppose the CEO of a major corporation has five subsidiary companies. Only one of these companies is ... (Read 59 times)

joesmith1212 · **on:** Jun 29, 2018

Suppose the CEO of a major corporation has five subsidiary companies. Only one of these companies is making better than the return on similar investments that the company could be making if it invested its financial capital outside the company.

The CEO tells each of these subsidiary companies that the rate of return that they are earning is not acceptable and must rise to the level of these identified companies. He tells them if they can't come up with a plan in twelve months that their companies will be sold. If each of these companies was actually making money can you come up with an economic argument for why it is still rational for this CEO to sell them if they don't abide by his directive.

Question 2

The table above shows the total product schedule for Shines Car Wash. The market for car washes is perfectly competitive and car washes sell for 5 each. The labor market is competitive and the wage rate is 50 per day.

What is the value of marginal product for each worker? How many workers does the firm hire to maximize profit?

kusterl · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The question really boils down to opportunity cost. If stock holders realize that their investments could do better elsewhere then they will be upset with the CEO even if the company is making money. The opportunity cost of hanging on to these companies is the difference between what they are making and what they could make. By selling of the ones that can't comply with the directive the company can take the proceeds and investment them in a way that will raise their return and profitability.

Answer to Question 2

Quantity of labor
(workers) Cars washed
(cars per day) Value of marginal product
(dollars per day)
1 8
2 23 75
3 33 50
4 40 35
5 45 25

The value of marginal product is the marginal product multiplied by the price of a car wash. The value of marginal product schedule is given in the table above. To maximize its profit, when the wage rate is 50 per day, Shines Car Wash hires 2 workers because at this point the value of marginal product equals the wage rate.