Consider a firm that uses only labour and capital as inputs. At the present use of labour and capital, the MP of labour is four times the MP of capital, and the price of labour is twice the price of capital. In order to minimize its costs, the firm should
A) decrease capital and increase labour.
B) substitute capital for labour until their marginal products are equal.
C) stay at its present factor mix.
D) decrease both capital and labour.
E) increase both labour and capital.

Question

Quizplus · Accepted Answer

The firm should decrease capital and increase labour because the marginal product per dollar spent on labour is higher than that on capital, indicating that the firm can reduce costs by using more labour and less capital.

Consider a Firm That Uses Only Labour and Capital as Inputs