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.What will change to move the firm to a new cost-minimizing equilibrium?
A)The marginal product of capital will fall and the marginal product of labor will increase.
B)The marginal product of labor will fall and the marginal product of capital will increase.
C)The price of labor will rise.
D)The price of capital will rise.

Question

Quizplus · Accepted Answer

A firm reaches a cost-minimizing equilibrium when the ratio of the marginal product to the price of each input is equal. In this case, the marginal product of capital is 30 and the price of capital is $10, so the ratio is 3. Similarly, the ratio for labor is 2.5. Therefore, the firm is using more capital than labor. To move to a new cost-minimizing equilibrium, the firm needs to decrease the use of capital and increase the use of labor until the ratios are equal. This means that the marginal product of capital should fall and the marginal product of labor should increase.

Assume a Firm Produces 500 Units of a Good by Using