If a firm faces perfectly competitive product and factor markets and the marginal product of labor and capital are 4 and 9, respectively, while the wage rate is $2 and the rental rate on capital is $4, the firm should

Question

Quizplus · Accepted Answer

The optimal combination of inputs occurs where the marginal product per dollar's worth of input is equal across all inputs. In this case, the marginal product of labor per dollar is 4/2 = 2, while the marginal product of capital per dollar is 9/4 = 2.25. Therefore, the firm should use relatively more of the input with a higher marginal product per dollar, which in this case is capital.

If a Firm Faces Perfectly Competitive Product and Factor Markets