Explain why in the long run marginal cost = w/MPL = r/MPK

Expert Solution

Profit maximizing firms will hire labor and capital up to the point where marginal cost of hiring in equal to marginal revenue earned from them, P. MPL =w and P.MPK ER price of the product (1) times marginal product of laleans I capital gives their wage (w) or rent (R). Paw Paper In the long run w = R a MPL MPK because the firm com sub change the amount of labor and capital both and it is possible to substitute labor with capital and capital with labor. This ratio will lee equal to marginal cost of the firm. MPK MPL

Rahul Sunny answered 2 years ago

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