Consider a firm that uses only labour and capital.At the present use of labour and capital,the MP of labour is twice the MP of capital,and the price of labour is four times the price of capital.In order to minimize its costs,the firm should
A)increase capital and decrease labour.
B)decrease both capital and labour.
C)decrease capital and increase labour.
D)increase both labour and capital.
E)maintain its present factor mix.

Question

Quizplus · Accepted Answer

To minimize costs, the firm should equate the ratio of marginal products to the ratio of input prices. Since the MP of labor is twice that of capital, but labor is four times as expensive, the firm should use more capital and less labor.

Consider a Firm That Uses Only Labour and Capital