The revenue department of a state government employs certified public accountants (CPAs)
to audit corporate tax returns and bookkeepers to audit individual returns. CPAs are paid
$31,200 per year, while the annual salary of a bookkeeper is $18,200. Given the current
staff of CPAs and bookkeepers, a study made by the department’s economist shows that
devoting one-year of a CPAs time to auditing corporate returns results in an average
additional tax collection of $52,000. In contrast, the bookkeepers only achieve additional
tax collection of $41,600 per year of a bookkeeper’s time.
i) If the department’s objective is to maximize tax revenue collected, is the present mix
CPAs and bookkeepers optimal? Explain.
ii) If the present mix of CPAs and bookkeepers is not optimal, explain what reallocation
should be made. That is, should the department hire more CPAs and fewer bookkeepers