Joan Jillson owns a coffee shop.Assume that the marginal product of the labor Joan employs (MP_L)equals 500 cups per week and the marginal product of her shop's capital (MP_K)equals 1,000.Assume also that the wage (w)Joan pays her workers equals $250 per week and the rental price (r)of her capital - her coffee machines - equals $500 per week.Which of the following correctly analyzes whether Joan is minimizing her costs?

Question

Quizplus · Accepted Answer

To minimize costs, Joan should use the inputs (labor and capital) so that the ratio of their marginal products equals the ratio of their prices.
The marginal product of labor (500 cups per week) divided by the wage ($250 per week) equals 2 cups per dollar.
The marginal product of capital (1,000 cups per week) divided by the rental price ($500 per week) equals 2 cups per dollar.
Since both ratios are equal, Joan is minimizing her costs by using the optimal combination of labor and capital.

Joan Jillson Owns a Coffee Shop