The equation MP_L/P_L = MP_C/P_C: A) designates the MR = MC level of output. B) assumes imperfect competition in the hiring of labor and capital. C) is a sufficient condition for the maximization of profits. D) is a necessary,but not sufficient,condition for the maximization of profits.

Question

Quizplus · Accepted Answer

The equation shows the ratio between the marginal product of labor and capital to their respective prices. It is necessary for profit maximization that the marginal revenue product (MRP) of each input is equal to its price, which signifies that any further input added would add to costs and decrease profits. The equation is thus a necessary condition for profit maximization, but not sufficient, as it only ensures that input prices are in line with their marginal revenue products. Other market and production factors can still impact the level of output that maximizes profits.

The Equation MPL/PL = MPC/PC

The Equation MP_L/P_L = MP_C/P_C