Suppose a firm is using 100 units of labour and 50 units of capital to produce 200 completed client tax returns per day.The price of labour is $10 per unit and the price of capital is $5 per unit.The MP_L equals 2 and the MP_K equals 5.In this situation, A)the firm is minimizing its costs. B)the firm should increase the use of both inputs. C)the firm could lower its production costs by decreasing labour input and increasing capital input. D)the firm could lower its production costs by increasing labour input and decreasing capital input. E)the firm should decrease the use of both inputs.

Question

Quizplus · Accepted Answer

To find the optimal combination of inputs, we need to calculate the MPPL/PL and MPPK/PK ratios:
- MPPL/PL = (change in output/change in labour) / PL = 200-180 / (110-100) / 10 = 2
- MPPK/PK = (change in output/change in capital) / PK = 200-250 / (60-50) / 5 = -5

The MPPL/PL ratio is greater than the price ratio (2 > 1/2), but the MPPK/PK ratio is less than the price ratio (-5 < -1). This suggests that the firm is using too much labour and too little capital relative to their respective prices. Therefore, the firm could lower its production costs by decreasing labour input and increasing capital input, which is the best choice.

Suppose a Firm Is Using 100 Units of Labour and 50