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.To minimize costs this firm should employ:
A)the existing combination of resources.
B)more labor and less capital.
C)more capital and less labor.
D)both more labor and more capital.

Question

Quizplus · Accepted Answer

To minimize costs, a firm should employ resources in such a way that the ratio of the marginal product to the price of each input is equal. Here, the marginal product per dollar for capital is 30/$10 = 3, and for labor, it's 10/$4 = 2.5. Since capital is more productive per dollar spent, the firm should use more capital and less labor to minimize costs.

Assume a Firm Produces 500 Units of a Good by Using