If a firm uses only capital and labor as inputs, then what should the firm do at a given rate of production if the marginal physical product of labor per last dollar spent is higher than the marginal physical product of capital per last dollar spent?

Question

Quizplus · Accepted Answer

If the marginal physical product of labor per last dollar spent is higher than the marginal physical product of capital per last dollar spent, it implies that labor is relatively cheap compared to capital. In this scenario, the firm should hire more labor and reduce capital, as it will increase overall productivity and profitability. Therefore, the best choice is to decrease the quantity of capital and increase the quantity of labor. Thus, option D is correct.

If a Firm Uses Only Capital and Labor as Inputs