Suppose a firm finds that an additional dollar spent on labor increases output more than does an additional dollar spent on machines. Under these conditions, the firm:
A) is technically efficient.
B) is economically efficient.
C) should substitute labor for machines if it wants to increase economic efficiency.
D) should substitute machines for labor if it wants to increase economic efficiency.

Question

Quizplus · Accepted Answer

The firm should allocate more resources to labor, as it yields a higher marginal product per dollar spent compared to machines, thus increasing economic efficiency.

Suppose a Firm Finds That an Additional Dollar Spent on Labor