Where should a producer stop devoting more of his spending on labor if initially the MRP of the additional dollar spent on labor is higher than the MRP of the additional unit spent on tools?
A)MRP/$ of additional labor falls below MRP/$ of additional tools.
B)MRP/$ of additional capital increases above MRP/$ of additional tools.
C)MRP/$ of additional labor becomes equal to MRP/$ of additional tools.
D)MRP/$ of the additional labor falls to zero.

Question

Quizplus · Accepted Answer

When the MRP/$ of additional labor becomes equal to the MRP/$ of additional tools, it indicates that the producer is allocating his spending efficiently between labor and capital. Beyond this point, allocating more spending on labor would result in diminishing returns while allocating more spending on capital would result in increasing returns. Therefore, stopping at this point would maximize the producer's output and profits.

Where Should a Producer Stop Devoting More of His Spending