Problem: Dragon, Inc. is a large marketing company that sells recorded DVDs to phone-in customers. Demand for Dragon's products is running ahead of the firm's capacity to process orders so that customers are encountering busy signals when attempting to place telephone orders, and many customers are giving up. Dragon estimates that sales could increase considerably if the problem could be resolved.
Dragon has two alternative strategies for solving the problem of busy signals. One strategy would involve adding some additional WATS lines to carry the phone traffic. Each WATS line can handle 120 calls per hour and costs the firm $25 per hour. The other strategy is to hire additional workers to handle the incoming calls. Each worker averages 40 calls per hour and workers receive an hourly wage of $10.00.
Q1. What are the marginal products of an additional worker and of an additional WATS line in this case?
Q2. To reduce the marginal cost of completing a call, what would you recommend concerning the relative mix of the two inputs; i.e., should the ratio of WATS lines to workers be increased, decreased, or remain constant? Support your answer with appropriate economic analysis.