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. If MP_C/ P_C MP_L/ P_L, the firm A) may be maximizing profits, but it is not minimizing costs. B) may be minimizing costs, but it is not maximizing profits. C) is neither minimizing costs nor maximizing profits. D) is minimizing costs and maximizing profits.

Question

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. If MP_C/ P_C> MP_L/ P_L, the firm A) may be maximizing profits, but it is not minimizing costs. B) may be minimizing costs, but it is not maximizing profits. C) is neither minimizing costs nor maximizing profits. D) is minimizing costs and maximizing profits.

Quizplus · Accepted Answer

The firm is not maximizing profits or minimizing costs because the marginal product per dollar spent on capital is greater than that of labor, indicating an inefficient allocation of resources.

Suppose a Firm Hires Both Labor (L) and Capital (C)