If a firm pays labor $5 and receives an MP_Lof 10, while paying capital $100 and receiving an MP_Cof 100, to lower production costs it should hire more labor and less capital.

Question

Quizplus · Accepted Answer

According to the given information, the marginal product of labor (MPL) is 10 and the marginal product of capital (MPK) is 100, while the cost of labor is only $5 and the cost of capital is $100. This implies that the firm is getting more output per dollar spent on labor compared to capital. Therefore, to lower production costs, the firm should hire more labor and use relatively less capital. This would increase the marginal product per dollar spent on labor and decrease the marginal product per dollar spent on capital, leading to a lower average cost of production.

If a Firm Pays Labor $5 and Receives an MPL

If a Firm Pays Labor $5 and Receives an MP_L