Which of the following identifies the optimal usage of inputs by a profit-maximizing firm?
A) Marginal product of labor = marginal product of capital = 0
B) Marginal product of labor/price of labor = marginal product of capital/price of capital
C) Marginal revenue product of labor = marginal revenue product of capital
D) Marginal cost of labor = marginal cost of capital
E) Marginal product of labor/marginal product of capital = price of capital/price of labor

Question

Quizplus · Accepted Answer

The optimal usage of inputs by a profit-maximizing firm occurs where the ratio of the marginal product of labor to the price of labor equals the ratio of the marginal product of capital to the price of capital. This is because, in the short run, a firm will continue to hire inputs until the marginal product of the last unit hired is equal to the additional cost of hiring that input (i.e. its price). Therefore, if the ratio of the marginal product to price is higher for one input than the other, the firm will hire more of that input. Option B identifies this condition.

Which of the Following Identifies the Optimal Usage of Inputs