At the XYZ Co. ,a unit of capital costs three times as much as a unit of labor.If MPK = 10,MPL = 5,then this firm
A)is minimizing its cost at current output level.
B)should use more capital and less labor to raise output at current cost.
C)should use less capital and more labor to raise output at current cost.
D)None of above.

Question

Quizplus · Accepted Answer

The firm's capital to labor ratio can be calculated using the capital cost and labor cost. Let the cost of a unit of labor be L, then the cost of a unit of capital will be 3L. 
The capital to labor ratio (K/L) will be (3L)/L = 3. 
At current output level, the marginal product of capital (MPK) and marginal product of labor (MPL) can be used to determine the optimal input mix. 
The firm should use more capital and less labor if MPK/MPL > K/L, and use less capital and more labor if MPK/MPL < K/L. 
Substituting the given values: 
MPK/MPL = 10/5 = 2 
K/L = 3 
Since MPK/MPL < K/L, the firm should use less capital and more labor to raise output at current cost. Therefore, choice C is the best choice.