A firm hires labor, capital, and land to produce tomatoes. Currently the marginal product of the last unit of labor input is 20, the marginal product of the last unit of capital input is 30, and the marginal product of the last unit of land input is 100. The market wage is $10 and the market price for capital is $15. If the firm is using the optimal combination of inputs, then the price of land is
A) $2.
B) $20.
C) $50.
D) indeterminate from the given information.

Question

Quizplus · Accepted Answer

The firm is using the optimal combination of inputs when the ratio of the marginal product to the price of each input is equal across all inputs. For labor, this ratio is 20/$10 = 2. For capital, it's 30/$15 = 2. For land, to maintain this ratio of 2, the marginal product of 100 must be divided by the price of land, leading to 100/Price of Land = 2. Solving for the Price of Land gives $50.

A Firm Hires Labor, Capital, and Land to Produce Tomatoes