Suppose a firm is hiring resources l and m under purely competitive conditions to produce product Y, which sells for $2 in a purely competitive market. The prices of l and m are $10 and $4, respectively. In equilibrium, the MPs of l and m, respectively, are
A)1 and 1.
B)2 and 5.
C)10 and 4.
D)5 and 2.

Question

Quizplus · Accepted Answer

In equilibrium, the firm will hire resources such that the marginal revenue product (MRP) equals the resource price. MRP is calculated as the marginal product (MP) times the price of the product. For resource l, MRP = MP * $2 = $10, so MP = 5. For resource m, MRP = MP * $2 = $4, so MP = 2.

Suppose a Firm Is Hiring Resources L and M Under