If a firm is using labour and capital such that the MP of labour is two times the MP of capital, and the price of labour is four times the price of capital, the firm should in order to minimize its costs of producing its output.
A) decrease both capital and labour
B) decrease capital and increase labour
C) not alter its present factor mix
D) increase both labour and capital
E) increase capital and decrease labour

Question

Quizplus · Accepted Answer

The firm should increase capital and decrease labour because the marginal product per dollar spent on capital is higher than that on labour, given that the MP of labour is twice that of capital but its price is four times higher.

If a Firm Is Using Labour and Capital Such That