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Hello
Im answering the questions from bpp kit of mock exam 4 . Question number 23.
If the shadow price for Month 2 is $125 per labour hour, which of the following statements is/are correct?
(a) The production manager would be willing to pay existing staff a maximum overtime premium of $125 per hour for the next 2,000 hours
(b) The production manager would be willing to pay a maximum of $170 per hour for an additional 2,000 hours of temporary staff time
? 1 only
? 2 only
? Both 1 and 2
? Neither 1 nor 2In the answer it says both are correct. I don’t understand how it is for additional 2000 hours?
It follows on from Q22.
When labour was limited to 12,000 hours they produced 3,000 of S and 2,000 of H.
If they had more labour at a maximum premium of $125 they would produce more S’s, but they would not produce more H’s because the extra contribution per hour from H is only $105.
The most extra S’s they can produce is 1,000 (because the maximum demand is 4,0000) and this would need an extra 1,000 x 2 = 2,000 hours.
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