A firm currently employs 80 units of labor and 50 units of capital equipment to produce 3,000 hamster cages. Given the current input levels utilized, the marginal product of labor is 40 and the marginal product of capital is 10. If we assume that labor costs $20 per unit and capital costs $10 per unit,
A) the firm is using the appropriate mix of labor and capital to minimize its costs.
B) the firm could lower its costs for the same level of output by using more labor and less capital.
C) the firm could lower its costs for the same level of output by using more capital and less labor.
D) the current MRP of capital exceeds the current MRP of labor.

Question

Quizplus · Accepted Answer

The firm should use more labor and less capital because the marginal product per dollar spent on labor (40/20 = 2) is greater than the marginal product per dollar spent on capital (10/10 = 1).

A Firm Currently Employs 80 Units of Labor and 50