Consider a firm that uses only labour and capital. At the present use of labour and capital, the MP of labour is twice the MP of capital, and the price of labour is four times the price of capital. In order to minimize its costs, the firm should
A) increase capital and decrease labour.
B) maintain its present factor mix.
C) decrease both capital and labour.
D) decrease capital and increase labour.
E) increase both labour and capital.

Question

Quizplus · Accepted Answer

The firm should adjust its input mix to equalize the marginal product per dollar spent on each input. Since the MP of labor is twice that of capital, but labor is four times as expensive, the firm should use more capital and less labor to minimize costs.

Consider a Firm That Uses Only Labour and Capital