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 with number of vehicle leased on horizontal axis and number of mechanics hired on vertical axes. Draw two iso-cost curves: one using annual the leasing cost per vehicle ($6,000) and the annual salary per mechanics ($25,000) given in the problem. In this case leasing vehicle cost is relatively inexpensive to the annual salary per mechanics, Now, another iso-cost curve, hypothetical (no data given) this time, in which annual mechanics cost is relatively inexpensive to vehicle leasing cost. Indicate graphically the (two) optimal combinations of mechanics hired and vehicles with one iso-quant curve representing a given (target) level of vehicle leasing business with two iso-cost curves; one based on given values of the annual cost of hiring mechanics and leasing vehicles in the problem and another iso-cost curve, hypothetical one, in which mechanics cost is relatively inexpensive, i.e., two reverse cases of iso-cost curves, and discuss implication behind two different optimal combinations of resources. To be consistent vehicles leased on horizontal and mechanics on vertical axes.