Assume a firm produces 500 units of a good by using two inputs,capital and labor,whose per unit prices are $10 and $4.Assume also that the marginal physical product of the last unit of capital is 30 and the marginal physical product of the last unit of labor is 10.Is this firm minimizing its costs of producing 500 units of output?
A)No, because the marginal products of the two inputs are not equal.
B)No, because the MRTS and the price ratio for the two inputs are not equal.
C)No, because the prices of the two inputs are not equal.
D)The answer cannot be determined without more information.

Question

Quizplus · Accepted Answer

The firm is not minimizing its costs because the marginal rate of technical substitution (MRTS) is not equal to the ratio of input prices. The MRTS is the ratio of the marginal product of labor to the marginal product of capital, which in this case is 10/30 or 1/3. The price ratio is 4/10 or 2/5. Since these ratios are not equal, the firm is not minimizing its costs.

Assume a Firm Produces 500 Units of a Good by Using