A cost- minimizing firm will increase its use of labour and decrease its use of capital when the
A) marginal product of capital, per dollar spent on capital, is greater than the marginal product of labour, per dollar spent on labour.
B) average product of capital is higher than the average product of labour.
C) total product of capital is higher than the total product of labour.
D) marginal product of capital, per dollar spent on capital, is less than the marginal product of labour, per dollar spent on labour.
E) marginal product of capital is higher than the marginal product of labour.

Question

Quizplus · Accepted Answer

A cost-minimizing firm will always choose the factor input (labour or capital) that provides the greatest marginal product per dollar spent. Therefore, if the marginal product of labour per dollar spent on labour is greater than the marginal product of capital per dollar spent on capital, then the firm will use more labour and less capital to minimize costs. This is the case in option D.

A Cost- Minimizing Firm Will Increase Its Use of Labour