Efficiency Analysis of Dog-Walking Business Inputs

Is the current mix of inputs in the dog-walking business efficient?

a. This mix of inputs is inefficient, you should be using more Pros.
b. This mix of inputs is inefficient, you should be using more Newbies.
c. This mix of inputs is efficient; don't change a thing.
d. None of the above,

Answer:

The correct answer is: c. This mix of inputs is efficient; don't change a thing.

To determine whether the current mix of inputs in your dog-walking business is efficient, we need to compare the marginal products (MP) of the two inputs (Pros and Newbies) with their respective input prices.

Given the information provided:

MPPros (marginal product of Pros) = 28

MPNewbies (marginal product of Newbies) = 16

PricePros (cost per day for each Pro) = $70

PriceNewbies (cost per day for each Newbie) = $40

To assess efficiency, we need to compare the ratio of marginal product to price (MP/P) for each input. This ratio represents the amount of output generated per dollar spent on each input.

For Pros:

MPPros / PricePros = 28 / 70 ≈ 0.4

For Newbies:

MPNewbies / PriceNewbies = 16 / 40 = 0.4

Both ratios are equal at approximately 0.4, indicating that the marginal product per dollar spent is the same for Pros and Newbies. This implies that the inputs are being utilized efficiently, as both inputs are generating an equivalent amount of output relative to their costs.

Efficiency in utilizing inputs is crucial for maximizing profitability in a business. By ensuring that the marginal product per dollar spent is balanced across different inputs, businesses can optimize their resources and achieve higher overall productivity.