Suppose a firm hires both labor (L) and capital (C) under purely competitive conditions. The price of labor is P_L, and that of capital is P_C. The marginal product of labor is MP_L, and that of capital is MP_C. The firm sells its product competitively at a price of P_X. Which of the following must pertain if the firm is to minimize the cost of producing any output? A) $\mathrm { MP }_ { C } = \mathrm { MP }_ { L } = P _ { X } $ B) $\mathrm{MPC}_{C}=P_{C} \text { and } \mathrm{MP}_{L}=P_{L}$ C) $\mathrm{MP} _{C} / P_{C}=\mathrm{MP}_{L} / P_{L}$ D) $\mathrm { MP } _{C} / P _{X} = M \mathrm { MP } _ { L } / P _{X} $

Question

Quizplus · Accepted Answer

The firm will minimize the cost of producing any output when the ratio of the marginal product to the price is equal for both labor and capital. In other words, the firm should hire labor and capital until MP/P ratio for both is the same. So, the correct answer is C, where MPc/Pc= MPl/Pl.

Suppose a Firm Hires Both Labor (L) and Capital (C) MPC=MPL=PX\mathrm { MP }_ { C } = \mathrm { MP }_ { L } = P _ { X } MPC​=MPL​=PX​

Suppose a Firm Hires Both Labor (L) and Capital (C) $\mathrm { MP }_ { C } = \mathrm { MP }_ { L } = P _ { X }$