Suppose a firm is using 1500 units of labour and 20 units of capital to produce 100 tonnes of mineral ore.The price of labour is $50 per unit and the price of capital is $800 per unit.The MP_L equals 60 and the MP_K equals 1200.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 determine whether the firm is minimizing its costs, we need to calculate the marginal cost of labour and the marginal cost of capital and compare them to their respective prices. However, since we are not given any information about the prices of the outputs, we cannot make this calculation. The fact that MP_L=60 and MP_K=1200 means that the marginal product of labour (MPL) is increasing at a decreasing rate as more labour is employed, and the marginal product of capital (MPK) is decreasing at an increasing rate as more capital is employed. This implies that the firm is currently using too much labour relative to capital, since the marginal cost of labour is higher than its marginal product, and the marginal cost of capital is lower than its marginal product. Therefore, the firm could lower its production costs by decreasing labour input and increasing capital input, while keeping output constant. This would reduce the marginal cost of labour and increase the marginal cost of capital, leading to a more efficient use of the two inputs. Therefore, the correct answer is C.

Suppose a Firm Is Using 1500 Units of Labour and 20