Suppose the marginal product of labor is 10 and the marginal product of capital is 8.If the wage rate is $5 and the price of capital is $2,then in order to minimize costs the firm should use:
A) more capital and less labor.
B) more labor and less capital.
C) equal amounts of labor and capital.
D) None of the preceding statements is correct.

Question

Quizplus · Accepted Answer

To minimize costs, a firm should use inputs in such a way that the ratio of the marginal product to the price of each input is equalized. Here, the marginal product of labor to its price is 10/5 = 2, and the marginal product of capital to its price is 8/2 = 4. Since the ratio for capital is higher, the firm should use more capital and less labor to minimize costs.

Suppose the Marginal Product of Labor Is 10 and the Marginal