Suppose labor and capital are variable inputs. The wage rate is $20 per hour, the marginal product of labor is 30 units, the rental rate of capital is $100 per machine hour, and the marginal product of capital is 150 units. If the wage rate declines to $15 per hour, the firm employs more labor and the marginal product of labor declines to 20 units. Assuming the rental rate of capital remains the same, what is the marginal product of capital at the new optimal level of input usage?
A) 100 units
B) 133 units
C) 150 units
D) We do not have enough information to answer this question.

Question

Quizplus · Accepted Answer

The firm will adjust inputs to equalize the marginal product per dollar spent on each input. Initially, MPL/PL = 30/20 = 1.5 and MPK/PK = 150/100 = 1.5. After the wage rate declines, MPL/PL = 20/15 = 1.33. To maintain equality, MPK/PK should also be 1.33, so MPK = 1.33 * 100 = 133 units.

Suppose Labor and Capital Are Variable Inputs