If the marginal physical product of more labor is twice as high as the marginal physical product of more machinery, a rational firm should
A)reduce the labor used and increase the machinery used if labor costs half as much as machinery.
B)reduce the labor used and increase the machinery used if labor and machinery cost the same amount.
C)reduce the labor used and increase the machinery used only if labor costs more than twice as much as machinery.
D)reduce the labor used and increase the machinery used only if labor costs exactly twice as much as machinery.

Question

Quizplus · Accepted Answer

The rational decision for a firm, when the marginal physical product of labor is twice that of machinery, is to adjust the use of labor and machinery based on their costs. If labor costs more than twice as much as machinery, it becomes cost-effective to reduce labor use and increase machinery use, as the firm gets more output per dollar spent on machinery compared to labor. This aligns with the principle of equating the marginal rate of technical substitution (MRTS) with the ratio of input costs to achieve cost minimization.

If the Marginal Physical Product of More Labor Is Twice