A profit-maximizing firm will increase its use of capital and decrease its use of labour when the
A)marginal product of capital is higher than the marginal product of labour.
B)marginal product of capital,per dollar spent on capital,is greater than the marginal product of labour,per dollar spent on labour.
C)average product of capital is higher than the average product of labour.
D)total product of capital is higher than the total product of labour.
E)marginal product of capital,per dollar spent on capital,is less than the marginal product of labour,per dollar spent on labour.

Question

Quizplus · Accepted Answer

A profit-maximizing firm will allocate its resources in such a way that the marginal product per dollar spent on each factor of production is equal. If the marginal product of capital, per dollar spent on capital, is greater than the marginal product of labour, per dollar spent on labour, then the firm will increase its use of capital and decrease its use of labour to achieve the optimal allocation of resources and maximize profits.

A Profit-Maximizing Firm Will Increase Its Use of Capital and Decrease