Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 20

A manager hires labor and rents capital equipment in a very competitive market. Currently the wage rate is $12 per hour and capital is rented at $8 per hour. If the marginal product of labor is 60 units of output per hour and the marginal product of capital is 45 units of output per hour, is the firm using the cost minimizing combination of labor and capital? If not, should the firm increase or decrease the amount of capital used in its production process?