Refer to the following:

A producer is hiring 20 units of labor and 6 units of capital (bundle A). The price of labor is $10, the price of capital is $2, and at A, the marginal products of labor and capital are both equal to 20.

-Beginning at A, if the producer increases expenditures on labor by $1 and decreases expenditures on capital by $1, then
A) cost remains constant and output decreases by 8 units.
B) cost remains constant and output increases by 12 units.
C) cost remains constant and output increases by 20 units.
D) output remains constant and cost increases by $8.
E) output remains constant and cost decreases by $2.

Question

Refer to the following:

A producer is hiring 20 units of labor and 6 units of capital (bundle A).  The price of labor is $10, the price of capital is $2, and at A, the marginal products of labor and capital are both equal to 20.

-Beginning at A, if the producer increases expenditures on labor by $1 and decreases expenditures on capital by $1, then
A) cost remains constant and output decreases by 8 units.
B) cost remains constant and output increases by 12 units.
C) cost remains constant and output increases by 20 units.
D) output remains constant and cost increases by $8.
E) output remains constant and cost decreases by $2.

Quizplus · Accepted Answer

The Answer of Refer to the following:

A producer is hiring 20 units of labor and 6 units of capital (bundle A).  The price of labor is $10, the price of capital is $2, and at A, the marginal products of labor and capital are both equal to 20.

-Beginning at A, if the producer increases expenditures on labor by $1 and decreases expenditures on capital by $1, then
A) cost remains constant and output decreases by 8 units.
B) cost remains constant and output increases by 12 units.
C) cost remains constant and output increases by 20 units.
D) output remains constant and cost increases by $8.
E) output remains constant and cost decreases by $2.

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