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The owner of a small car-rental service is trying to decide on the appropriate numbers of vehicles and mechanics to use in the business for the...

This question was answered on Jan 25, 2013. View the Answer
The owner of a small car-rental service is trying to decide on the appropriate numbers of vehicles and mechanics to use in the business for the current level of operations. He recognizes that his choice represents a trade-off between the two resources. His past experience indicates that this trade-off is as follows:







Vehicles Mechanics

100 2.5 (include one part-timer)
70 5
50 10.
40 15
35 25
32 35

1. Assume that annual (leasing) cost per vehicle is $6,000 and the annual salary per mechanic is $25,000. What combination of vehicles and mechanics should he employ?
2. Illustrate the problem with the use of an iso-quant/iso-cost diagram. Draw two hypothetical iso-cost curves: one with annual leasing cost per vehicle being relatively inexpensive to the annual salary per mechanics, and another with annual leasing cost per vehicle being more expensive to the annual salary of mechanic. Indicate graphically the optimal combination of resources depending upon two reverse cases of iso-cost curves, and discuss implication behind two different optimal combinations of resources. To be consistent place leasing cost on vertical axis while mechanic’s salary on horizontal axis.
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Please use this attached... View the full answer

8424364.doc

A
B When mechanics are more costly than vehicles we like to use more of vehicles shown by point
A on BL 2
When mechanics are less costly than vehicles we like to less of vehicles shown by point B...

This question was asked on Jan 25, 2013 and answered on Jan 25, 2013.

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