A business is employing inputs such that the marginal product of labor is 40 and the marginal product of capital is 90. The price of labor is $20, and the price of capital is $30. If the business wants to minimize costs while keeping output constant, 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

To minimize costs while keeping output constant, a business should employ inputs until the ratio of the marginal product to the price of each input is equal across all inputs. Here, the marginal product per dollar for labor is 40/20 = 2, and for capital is 90/30 = 3. Since capital has a higher marginal product per dollar spent, the business should use less labor and more capital to minimize costs.

A Business Is Employing Inputs Such That the Marginal Product