Question

The firm is currently using 900 units of labor and 150 units of capital to produce 200,000 units of output. At this combination the marginal product of labor is 25 and the marginal product of capital is 60. The price of labor is $50 and the price of capital is $30.

a. The MP per dollar of labor is _________ and the MP per dollar of capital is _________.

b. The firm can increase capital by one unit and decrease labor by _________ units while keeping

output constant. This will ____________ (increase, decrease, not change) cost by _________.

c. If the firm increases capital and reduces labor the marginal product of capital will

____________ (rise, fall, remain the same), while the marginal product of labor will ____________

(rise, fall, remain the same).

d. To produce the current output at the minimum cost the firm will increase ____________ and decrease ____________ until the _________ equals _________.

Answer 1

a) The MP per dollar of labor = 25 / 50 = 0.5 and the MP per dollar of capital = 60 / 30 = 2.

b) The firm can increase capital by one unit and decrease labor by 2.4 (i.e., 60 / 25) units while keeping output constant. This will decrease cost by $90 [i.e., ($50 * 2.4) - $30]

c) If the firm increases capital and reduces labor the marginal product of capital will fall, while the marginal product of labor will rise.

d) To produce the current output at the minimum cost the firm will increase capital and decrease labor until the MP per dollar spent on capital equals MP per dollar spent on labor.