If the marginal product of labor is four times the marginal product of capital and the price of labor is twice the price of capital,then:
A)labor will be substituted for capital by a profit maximizing firm.
B)capital will be substituted for labor by a profit maximizing firm.
C)output cannot be expanded any further by using the same input levels.
D)input usage should be left unchanged.

Question

Quizplus · Accepted Answer

A profit maximizing firm will substitute labor for capital because the marginal product of labor is higher in relation to its cost (price) compared to the marginal product of capital. Therefore, using more labor and less capital will increase the output level while keeping the production cost relatively low.

If the Marginal Product of Labor Is Four Times the Marginal