A firm is employing inputs such that the marginal product of labor is 25 and the marginal product of capital is 40. The price of labor is $5, and the price of capital is $8. If the firm wants to minimize costs, then it should
A)use more labor and less capital.
B)use less labor and less capital.
C)use less labor and more capital.
D)make no change in resource use.

Question

Quizplus · Accepted Answer

The firm is currently minimizing costs because the ratio of the marginal product of labor to the price of labor (25/5) is equal to the ratio of the marginal product of capital to the price of capital (40/8), both equaling 5. This indicates that the firm is allocating resources efficiently according to the principle of cost minimization.

A Firm Is Employing Inputs Such That the Marginal Product