Suppose a competitive firm in both the resource and product markets is using inputs such that the marginal product of labor is 16 and the price of labor is $4 per unit, while the marginal product of capital is 12 and the price of capital is $3 per unit. At the maximum profit equilibrium point, the price of the product is
A)$3.
B)$4.
C)$0.25.
D)between $3 and $4.

Question

Quizplus · Accepted Answer

The profit-maximizing condition for a competitive firm is that the marginal product of each input should be equal to the price of that input divided by the price of the product. In this case, the marginal product of labor is 16, the price of labor is $4, the marginal product of capital is 12, and the price of capital is $3. Therefore, the price of the product must be $3 / 16 = $0.25.

Suppose a Competitive Firm in Both the Resource and Product