Assume a firm is producing 1000 units of a good by using two inputs,capital and labor,whose per unit prices are $50 and $20.Assume also that the marginal physical product of the last unit of capital is 25 and the marginal physical product of the last unit of labor is 15.In order to minimize its costs of production,the firm should adjust its combination of inputs by employing more labor and less capital.

Question

Quizplus · Accepted Answer

The firm should use inputs in such a way that the marginal cost per unit of the last dollar spent on each input is equal. The marginal cost of capital is $2 per unit ($50/25) and the marginal cost of labor is $1.33 per unit ($20/15). Since the marginal cost of labor is lower, the firm should employ more labor and less capital to minimize its costs of production.

Assume a Firm Is Producing 1000 Units of a Good