A firm is using 500 units of labor and 100 units of capital to produce 100 units of output.Labor costs $5 per unit and capital $20 per unit.At these input levels,another unit of labor adds 5 units of output,while another unit of capital adds 40 units of output.If the firm uses 496 units of labor and 101 units of capital instead,what will happen?
A)Cost will be unchanged,and output will increase by 20 units.
B)Cost will be unchanged,and output will increase by 35 units.
C)Output will be unchanged,and cost will decrease by $20.
D)Output will be unchanged,and cost will decrease by $40.

Question

Quizplus · Accepted Answer

Switching from 500 units of labor to 496 saves $20 (4 units of labor at $5 each) and adding one unit of capital costs $20, so the total cost remains the same. The reduction in labor reduces output by 20 units (4 units of labor times 5 units of output per unit of labor), but adding one unit of capital increases output by 40 units, resulting in a net increase of 20 units of output.

A Firm Is Using 500 Units of Labor and 100