Suppose a firm is using labor and capital and obtaining the maximum possible output for a given total cost.If the price of labor increases, all other things unchanged, then the firm will:
A) shift funds out of labor into capital.
B) adjust factor utilization until the ratios of marginal product to price are equal for the two factors.
C) hire less labor, which will result in an increase in labor's marginal product, and hire more capital, leading to a fall in the marginal product of capital.
D) do all of the above.

Question

Quizplus · Accepted Answer

When the price of labor increases, a firm will reallocate its resources to maintain cost efficiency. This involves shifting funds from labor to capital (A), adjusting factor utilization to equalize the ratio of marginal product to price for both factors (B), and hiring less labor (which increases its marginal product) while hiring more capital (which decreases its marginal product) (C). Thus, all of the actions described in options A, B, and C are correct responses to an increase in the price of labor, making D the correct answer.

Suppose a Firm Is Using Labor and Capital and Obtaining