The HRB Corporation is
the world’s only manufacturer of air filters for Zamboni engines.Last year,...

Question

The HRB Corporation is
 the world’s only manufacturer of air filters for Zamboni engines.Last year, HRB charged $20 per filter
 and sold 1 million of them, and it paid all of its production workers $10
 per hour. This year, something happened at HRB headquarters (not announced
 to the public) that caused HRB to lower its price to $18 per filter. (HRB
 is still a profit-maximizing company.) This enabled HRB to sell 1.2
 million filters. Its workers all continue to earn $10 per hour.

What is the elasticity
 of demand for Zamboni air filters?

How much additional
 revenue does HRB earn if it sells one more air filter this year? How much
 additional revenue would HRB have earned if it sold one more air filter
 last year?

How much are HRB’s
 employees paid relative to the value they create? (That is, what is the
 ratio of the wage to the value of the worker’s marginal product (price x
 MPL)?)

What was the workers’
 marginal product last year? What is it this year?

Suppose you are
 considering only two explanations for the increase in HRB’s output: (1)
 HRB invested in better equipment and kept the same number of workers, or
 (2) HRB hired more workers to use its existing equipment. Given your
 observations above, which makes more sense? Why?

David · Accepted Answer

1. The HRB Corporation is the world’s only manufacturer of air filters for Zamboni 
engines. Last year, HRB charged $20 per filter and sold 1 million of them, and it paid all 
of its production workers $10 per hour. This year, something happened at HRB 
headquarters (not announced to the public) that caused HRB to lower its price to $18 per 
filter. (HRB is still a profit-maximizing company.) This enabled HRB to sell 1.2 million 
filters. Its workers all continue to earn $10 per hour. 
a. What is the elasticity of demand for Zamboni air filters? 
Answer: 
Elasticity of demand is given as: 
ed  = ( )
     
  

     
 
Here Q2 = 1.2 million, Q1 = 1 million, P1 = $20 and P2 = $18 
So elasticity of demand (ed) = ((1.2-1)/1)*(20/(18-20)) = -2 
b. How much additional revenue does HRB earn if it sells one more air filter this 
year?

The HRB Corporation is the world’s only manufacturer of air filters for Zamboni engines.Last year, HRB charged $20 per filter and sold 1 million of them, and it paid all of its production workers $10...

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