A firm is using 500 units of labor and 100 units of capital to produce 100 units of output. Labor costs $5 per unit and capital $20 per unit. At these input levels, another unit of labor adds 5 units of output, while another unit of capital adds 40 units of output. If the firm uses 496 units of labor and 101 units of capital instead, what will happen?
A) Cost will be unchanged, and output will increase by 20 units.
B) Cost will be unchanged, and output will increase by 35 units.
C) Output will be unchanged, and cost will decrease by $20.
D) Output will be unchanged, and cost will decrease by $40.

Question

Quizplus · Accepted Answer

The marginal product of labor is 5 units of output per unit of labor, and the marginal product of capital is 40 units of output per unit of capital. So, if the firm uses 496 units of labor and 101 units of capital instead, it will produce 496 * 5 + 101 * 40 = 10,000 units of output. This is an increase of 20 units of output compared to the original production level of 100 units. The cost of production will be unchanged, because the firm is using the same amount of labor and capital as before.

A Firm Is Using 500 Units of Labor and 100