Assume a firm is currently employing 20 units of capital and 100 units of labor in its production process.Assume also that the marginal product of the 20ᵗʰ unit of capital is 40 units of output,the marginal product of the 100ᵗʰ unit of labor is 10 units of output and the per unit prices of capital and labor are $20 and $10,respectively.In this case,in order to minimize its costs of production the firm should:
A)hire more capital and less labor.
B)hire more labor and less capital.
C)hire less capital and less labor.
D)hire more capital and more labor.

Question

Quizplus · Accepted Answer

To minimize production costs, a firm should aim for an equal marginal product per dollar spent on all inputs. Here, the marginal product per dollar for capital is 40 units/$20 = 2 units per dollar, and for labor, it's 10 units/$10 = 1 unit per dollar. Therefore, the firm should hire more capital and less labor to equalize the marginal product per dollar spent on each.

Assume a Firm Is Currently Employing 20 Units of Capital