Suppose that capital costs $8 per unit and labour costs $4 per unit.For a profit- maximizing firm operating at its optimal factor mix,if the marginal product of capital is 60,the marginal product of labour must be
A)10.
B)20.
C)30.
D)90.
E)120.

Question

Quizplus · Accepted Answer

To maximize profits, a firm should choose the combination of capital and labour where the marginal product per dollar spent on each factor is equal.

In this case, the cost of capital is $8 and its marginal product is 60, which means that the marginal product per dollar spent on capital is 60/8 or 7.5.

The cost of labour is $4 and we need to find the marginal product of labour that would also yield a marginal product per dollar spent of 7.5.

Let MPL be the marginal product of labour. Then, the equation would be:

MPL/4 = 7.5

Solving for MPL, we get:

MPL = 4 x 7.5 = 30

Therefore, the marginal product of labour must be 30 for the firm to operate at its optimal factor mix and maximize profits.

Suppose That Capital Costs $8 Per Unit and Labour Costs