When a cost- minimizing firm is faced with an increase in the relative price of labour,it adjusts its factor usage so as to
A)increase the marginal product of labour relative to the marginal product of capital.
B)use more labour per unit of output than before.
C)increase the marginal product of capital relative to the marginal product of labour.
D)maintain the previous usage of labour.
E)use more of both capital and labour per unit of output.

Question

Quizplus · Accepted Answer

When the relative price of labour increases, it becomes relatively more expensive to use. Therefore, the firm will try to substitute away from labour by using more capital. To do this, the firm will increase the marginal product of labour relative to the marginal product of capital to achieve cost-minimization.

When a Cost- Minimizing Firm Is Faced with an Increase