Question

Suppose that the price of labor is $10 per unit and the price of capital is $20 per unit.

1. Assuming the firm is minimizing its cost, if the marginal product of labor is 50, what must the marginal product of capital be ?

2. Suppose the price of capital increases to $25 per unit, while the price of labor stays the same. To minimize the cost of producing the same level of output, would the firm become more capital-intensive or labor-intensive? Explain.

Answer 1

Ответ:

1. To minimize cost, the firm should allocate resources in a way that the marginal product per dollar spent on each input is equal. Since the price of labor is $10 per unit and the marginal product of labor is 50, the marginal product of capital must be 25 (50/10) to achieve cost minimization.

2. With the price of capital increasing to $25 per unit, while the price of labor remains the same, the firm would become more labor-intensive. This is because the cost of capital has increased relative to labor, making it more expensive to employ capital compared to labor. To minimize cost, the firm would allocate more resources to labor, which is the relatively cheaper input.