Suppose MPL = 0.5 ∗ (q/L)and MPK = 0.5 ∗ (q/K).In the long run,the firm will hire equal amounts of capital and labor
A)all of the time.
B)only when w = r.
C)only when w = 0.5 ∗ r.
D)at no point in time.

Question

Quizplus · Accepted Answer

In the long run, the firm will hire inputs in such a way that the marginal product per dollar spent on each input is equal. This means that the firm will hire capital and labor in such a way that the wage rate (w) divided by the rental rate (r) is equal for both inputs. In other words, w/r = MPK/r = MPL/w. Simplifying this expression, we get w = 0.5 * r. Therefore, option C is incorrect. Option D is also incorrect because there must be some point in time when the firm hires equal amounts of capital and labor, as long as the prices of the inputs are such that w/r = 0.5. Option A is incorrect because the prices of capital and labor may not be such that the marginal products are equal. Therefore, the correct answer is B.