Suppose a firm uses labour and capital to produce output.The last unit of labour hired has a marginal product of 12 units of output, and the last unit of capital employed has a marginal product of 20 units.Use the optimal combination of inputs rule to calculate the price of capital if the price of labour is $6 per unit.The price of capital is
A)$2.
B)$10.
C)$20.
D)impossible to determine with the information given.

Question

Quizplus · Accepted Answer

According to the optimal combination of inputs rule, the firm should hire inputs until the marginal product per dollar spent on each input is equal. Let P be the price of capital. Then the marginal product of labor per dollar spent is 12/6 = 2 and the marginal product of capital per dollar spent is 20/P. Setting these equal to each other, we have:

2 = 20/P

Solving for P, we get:

P = 20/2 = 10

Therefore, the price of capital is $10.

Suppose a Firm Uses Labour and Capital to Produce Output