Roberta runs a dress factory.She produces 50 dresses per day, using labor and electricity.She uses a combination of labor and electricity that produces 50 dresses per day in the cheapest possible way.She can hire as much labor as she wants at a cost of 20 cents per minute.She can use as much electricity as she wants at a cost of 10 cents per minute.Her production isoquants are smooth curves without kinks and she uses positive amounts of both inputs.

Question

Quizplus · Accepted Answer

If we assume that Roberta is minimizing the cost of production, then the ratio of the marginal products of labor and electricity must be equal to the ratio of their prices. Since labor costs 20 cents per minute and electricity costs 10 cents per minute, the ratio of the prices is 2:1. Thus, the ratio of the marginal product of a minute of labor to the marginal product of a kilowatt-hour of electricity must also be 2:1. Therefore, the marginal product of a minute of labor is twice the marginal product of a kilowatt-hour of electricity.

Roberta Runs a Dress Factory