Suppose the wage rate is $15 per hour and the rental rate of capital is $10 per hour.If the
Marginal product of labor is 60 and the marginal product of capital 10,the profit maximizing firm should:
A)hire more labor and less capital.
B)utilize more capital and less labor.
C)maintain its current input mix of capital and labor.
D)employ more of both capital and labor.

Question

Quizplus · Accepted Answer

To maximize profit, the firm should hire inputs up to the point where the marginal revenue product of each input is equal to its cost (i.e., wage rate for labor and rental rate for capital).

In this case, the marginal revenue product of labor (MRPL) is $900 ($15 x 60), and the marginal cost of labor (MCPL) is $15. Therefore, the firm would want to hire more labor because MRPL > MCPL.

Similarly, the marginal revenue product of capital (MRPK) is $100 ($10 x 10), and the marginal cost of capital (MCPL) is $10. Therefore, the firm would want to use less capital because MRPK < MCKP.

So, the best choice is to hire more labor and less capital.

Suppose the Wage Rate Is $15 Per Hour and the Rental