Suppose that capital costs $50 per unit and labour costs $20 per unit.If the marginal product of capital is 100 and the marginal product of labour is 30,a cost-minimizing firm should
A)employ more of both capital and labour.
B)employ less of both capital and labour.
C)employ more capital and less labour.
D)employ less capital and more labour.
E)not change its current factor use.

Question

Quizplus · Accepted Answer

The firm should use more capital and less labour. This is because the marginal product of capital (100) is higher than the marginal product of labour (30) which means that using an additional unit of capital will increase output more than using an additional unit of labour. Therefore, the firm can reduce its total cost by substituting more capital for labour.

Suppose That Capital Costs $50 Per Unit and Labour Costs