Joan Jillson owns a coffee shop.Assume that the marginal product of the labor Joan employs (MPL)equals 500 cups per week and the marginal product of her shop's capital (MPK)equals 1,000.Assume also that the wage (w)Joan pays her workers equals $250 per week and the rental price (r)of her capital - her coffee machines - equals $500 per week.Which of the following correctly analyzes whether Joan is minimizing her costs?

Question

Quizplus · Accepted Answer

In order to minimize costs, Joan needs to hire labor and rent capital in such quantities that the ratio of the marginal product of labor to its wage is equal to the ratio of the marginal product of capital to its rental price. In other words, MPL/w = MPK/r. Here, MPL/w = 500/250 = 2 and MPK/r = 1000/500 = 2. Therefore, Joan is minimizing costs as the ratio of MPL to w equals the ratio of MPK to r.

Joan Jillson Owns a Coffee Shop