If the cost of capital is $15 per hour, the wage paid to employees is $25 per hour, the marginal product of capital is 90 units per hour, and the marginal product of labor is 100 units per hour, to minimize its costs, the firm should _________ .

Question

Quizplus · Accepted Answer

To minimize costs, the firm should use the inputs until the marginal productivity (the additional output produced by using an additional unit of input) of labor and capital equals their respective prices.

In this case, the marginal product of labor (MPL) is greater than the wage rate (W = $25/hour), so the firm should hire more labor until MPL = W. This implies that the firm should use more labor and less capital.

On the other hand, the marginal product of capital (MPK) is less than the cost of capital (r = $15/hour), so the firm should use less capital until MPK = r. This implies that the firm should use less capital and more labor.

Therefore, the best choice is to decrease the amount of labor used and increase the amount of capital used, which is answer choice C.

If the Cost of Capital Is $15 Per Hour, the Wage