Suppose a firm is currently minimizing costs in the long run with marginal product of labor and marginal product of capital given by ½(K/L)^1/2 and ½(L/K)^1/2, respectively. If the price of capital falls by 50%, the capital-to-labor ratio will: A) decrease by 50%. B) double. C) increase by 50%. D) increase fivefold.

Question

Quizplus · Accepted Answer

The capital-to-labor ratio will double. This is because the marginal product of capital increases relative to the marginal product of labor when the price of capital falls, making capital cheaper relative to labor. As a result, the firm will substitute labor with capital, increasing the capital-to-labor ratio.

Suppose a Firm Is Currently Minimizing Costs in the Long