producer is hiring 20 units of labor and 6 units of capital (bundle A).The price of labor is $10,the price of capital is $2,and at A,the marginal products of labor and capital are both equal to 20.In equilibrium, A)MP_L will be less than 20. B)MP_K will be more than 20. C)MP_L will be 5 times MP_K. D)a and b E)none of the above

Question

Quizplus · Accepted Answer

In equilibrium, the marginal rate of technical substitution (MRTS), which is the ratio of the marginal product of labor (MPL) to the marginal product of capital (MPK), should equal the ratio of the prices of labor to capital. Given MPL = MPK = 20, and the price of labor ($10) is 5 times the price of capital ($2), the MRTS (MPL/MPK) should equal the price ratio (Price of Labor/Price of Capital), which is 5. This means the marginal product of labor per dollar is 5 times the marginal product of capital per dollar, making option C correct.

Producer Is Hiring 20 Units of Labor and 6 Units