In a machine shop, the marginal physical product of an additional unit of labor is 4 units of output, while the marginal physical product of an additional piece of machinery is 2, under what conditions would the firm increase labor usage?
A)It would increase labor usage if the wage rate is more than twice the unit price of a piece of machinery.
B)It would increase labor usage if the wage rate is less than twice the unit price of a piece of machinery.
C)It would increase labor usage as long as the wage rate is less than the unit price of a piece of machinery.
D)It would not increase labor usage under any scenario.

Question

Quizplus · Accepted Answer

The firm should increase labor usage if the marginal revenue product of labor (MRPL) is greater than or equal to the wage rate. Therefore, if the marginal physical product of an additional unit of labor is 4 and the unit price of a piece of machinery is 2, the MRPL would be 4 times the price of output, while the MPP of machinery would be 2 times the price of output. This means that for the firm to choose labor over machinery, the wage rate needs to be less than twice the unit price of a piece of machinery. Therefore, choice B is correct.

In a Machine Shop, the Marginal Physical Product of an Additional