If MRP_labor/MRC_labor MRP_capital/MRC_capital, then the firm should A)hire more labor B)substitute capital for labor C)not change anything D)buy more capital E)decrease the amount of labor

Question

If MRP_labor/MRC_labor > MRP_capital/MRC_capital, then the firm should A)hire more labor B)substitute capital for labor C)not change anything D)buy more capital E)decrease the amount of labor

Quizplus · Accepted Answer

If the ratio of the marginal products of labor to the marginal products of capital is greater than the ratio of the prices of labor to the prices of capital, then the firm should hire more labor. This means that the additional output produced by hiring one more unit of labor is greater than the additional output produced by buying one more unit of capital. Hiring more labor would increase the marginal product of labor, which would lead to an increase in total output.

If MRPlabor/MRClabor > MRPcapital/MRCcapital, Then the Firm Should

If MRP_labor/MRC_labor > MRP_capital/MRC_capital, Then the Firm Should