If a firm fired one worker and lost 12 units of production and decides to add one more unit of capital, then to remain on the same isoquant what must be TRUE?
A)The MPK of the next unit of capital added equals 12.
B)The firm must force the other workers to work more.
C)The firm will experience a decline in output.
D)The marginal rate of technical substitution is greater than 12.

Question

Quizplus · Accepted Answer

In this scenario, the firm is facing a decrease in production due to the firing of one worker. To remain on the same isoquant, the firm needs to compensate for the lost production by adding more capital. The marginal product of capital (MPK) measures the increase in output resulting from adding one more unit of capital, while holding other inputs constant. Since the firm lost 12 units of production by firing one worker, it needs to add one more unit of capital whose MPK equals 12, so that the total increase in output due to the two adjustments (firing one worker and adding one unit of capital) balances out the 12-unit loss. Therefore, choice A is the correct answer.

If a Firm Fired One Worker and Lost 12 Units