If the cost of capital is $80 per hour, the wage paid to employees is $15 per hour, the marginal product of capital is 16 units per hour, and the marginal product of labor is 5 units per hour, to minimize its costs, the firm should _________ .

Question

Quizplus · Accepted Answer

To minimize costs, a firm should equate the marginal product per dollar spent on each input. The marginal product per dollar for labor is 5 units per $15, and for capital, it is 16 units per $80. Since the marginal product per dollar is higher for labor (1/3 vs. 1/5), the firm should increase labor and decrease capital to minimize costs.

If the Cost of Capital Is $80 Per Hour, the Wage