Refer to the following figure:
The price of capital is $50 per unit.
-What is the price per unit of labor?
A) $25
B) $20
C) $10
D) $ 2

Question

Refer to the following figure:
  The price of capital is $50 per unit.
-What is the price per unit of labor?
A) $25 
B) $20 
C) $10 
D) $ 2

Quizplus · Accepted Answer

The best choice is where the slope of the production function equals the ratio of the prices of the inputs. Looking at the graph, the slope of the production function is approximately 2.5. Therefore, we are looking for a point where the ratio of the prices of inputs equals 2.5. Since the price of capital is $50 per unit, we can find the price of labor by dividing the slope of the production function by the price of capital: 2.5/50 = 0.05. Therefore, the price of labor is $0.05 per unit. Among the given choices, the best choice is to use 100 units of labor, as this results in the highest output level on the production function.

Refer to the Following Figure