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 statements is correct.

Question

Quizplus · Accepted Answer

To minimize costs, the firm should use the factor that provides the highest marginal product per dollar spent. In this case, the marginal product of capital per dollar spent is 4 (8/2), while the marginal product of labor per dollar spent is 2 (10/5). Therefore, it is more cost-effective to use more capital and less labor.

Suppose the Marginal Product of Labor Is 10 and the Marginal