Suppose that capital costs $50 per unit and labour costs $20 per unit. If the marginal product of capital is 100 and the marginal product of labour is 30, a cost- minimizing firm should
A) employ more capital and less labour.
B) employ less of both capital and labour.
C) employ more of both capital and labour.
D) not change its current factor use.
E) employ less capital and more labour.

Question

Quizplus · Accepted Answer

The firm should always use the factor of production with the higher marginal product per dollar cost. In this case, the marginal product of capital is 100/50 = 2, while the marginal product of labour is 30/20 = 1.5. Therefore, the firm should employ more capital and less labour to minimize costs and maximize production.

Suppose That Capital Costs $50 Per Unit and Labour Costs