Suppose that a firm is using 100 units of labour and 50 units of capital to produce 200 fax machines per day. The price of labour is $10 per unit and the price of capital is $5 per unit. The MPL equals 2 and the MPK equals 5. In this situation,
A) the firm should decrease the use of both inputs.
B) the firm should increase the use of both inputs.
C) the firm is minimizing its costs.
D) the firm could lower its production costs by increasing labour input and decreasing capital input.
E) the firm could lower its production costs by decreasing labour input and increasing capital input.

Question

Quizplus · Accepted Answer

The firm should adjust its input mix to equalize the marginal product per dollar spent on each input. Currently, MPL/Price of Labour = 2/10 = 0.2 and MPK/Price of Capital = 5/5 = 1. Since MPK per dollar is higher, the firm should use more capital and less labour to minimize costs.

Suppose That a Firm Is Using 100 Units of Labour