Suppose that capital costs $100 per unit and labour costs $40 per unit.If the marginal product of capital is 200 and the marginal product of labour is 60,a cost- minimizing firm should
A)employ more of both capital and labour.
B)employ less of both capital and labour.
C)not change its current factor use.
D)employ less capital and more labour.
E)employ more capital and less labour.

Question

Quizplus · Accepted Answer

The firm should employ more capital and less labour because the marginal product per dollar spent on capital (200/100 = 2) is greater than the marginal product per dollar spent on labour (60/40 = 1.5). This indicates that capital is more productive per dollar spent, so the firm should allocate more resources to capital.

Suppose That Capital Costs $100 Per Unit and Labour Costs