A business is employing inputs such that the marginal product of labor is 40 and the marginal product of capital is 90. The price of labor is $20, and the price of capital is $30. If the business wants to minimize costs while keeping output constant, then it should
A) use more labor and less capital.
B) use less labor and less capital.
C) use less labor and more capital.
D) make no change in resource use.

Question

Quizplus · Accepted Answer

To minimize costs while keeping output constant, the business should use the inputs in the ratio of their marginal product to their price. Here, the marginal product of capital is higher than the marginal product of labor, so to minimize costs, the business should use relatively more capital and relatively less labor. The ratio of the marginal product of labor to the price of labor is 40/20 = 2, and the ratio of the marginal product of capital to the price of capital is 90/30 = 3. Therefore, the business should use capital and labor in a ratio of 2:3, which means using relatively less labor and relatively more capital. Choice C matches this reasoning.

A Business Is Employing Inputs Such That the Marginal Product