Suppose that capital costs $6 per unit and labour costs $3 per unit. If the marginal product of capital is 3 and the marginal product of labour is 6, the cost- minimizing firm should
A) employ more capital and less labour.
B) employ less capital and more labour.
C) not change its current factor use.
D) employ less of both capital and labour.
E) employ more of both capital and labour.

Question

Quizplus · Accepted Answer

The cost-minimizing firm should use the inputs in such a way that the ratio of marginal product to price is equal across inputs. In this case, the ratio of marginal product to price for capital is 0.5 (3/6) and for labour is 2 (6/3). Since the ratio is higher for labour, the firm should employ more labour and less capital to achieve the cost-minimizing combination of inputs.

Suppose That Capital Costs $6 Per Unit and Labour Costs