Suppose capital and labor are perfect substitutes in a long-run production process. If labor costs $15 per hour and the rental rate of capital is $20 per hour, what can we say about the profit maximizing choice of labor and capital inputs?
A) We will only use labor in the production process.
B) We will only use capital in the production process.
C) We will use equal amounts of capital and labor.
D) The optimal capital-labor ratio is 0.75-to-1.

Question

Quizplus · Accepted Answer

Since labor is cheaper ($15 per hour) than capital ($20 per hour) and they are perfect substitutes, a profit-maximizing firm will only use labor in the production process to minimize costs.

Suppose Capital and Labor Are Perfect Substitutes in a Long-Run