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.

-The producer
A) is using the optimal combination of capital and labor.
B) should use more labor and less capital.
C) should use more capital and less labor.
D) cannot determine without more information.

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.

-The producer
A) is using the optimal combination of capital and labor.
B) should use more labor and less capital.
C) should use more capital and less labor.
D) cannot determine without more information.

Quizplus · Accepted Answer

The producer should use more capital and less labor because the marginal product per dollar spent on capital (20/2 = 10) is greater than the marginal product per dollar spent on labor (20/10 = 2).

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