Suppose a competitive firm in both the resource and product markets is using inputs such that the marginal product of labor is 16 and the price of labor is $4 per unit, while the marginal product of capital is 12 and the price of capital is $3 per unit. At the maximum profit equilibrium point, the price of the product is
A) $3.
B) $4.
C) $0.25.
D) between $3 and $4.

Question

Quizplus · Accepted Answer

The profit-maximizing condition for a competitive firm is that the marginal product of labor divided by the price of labor equals the marginal product of capital divided by the price of capital. In this case, 16/4 = 12/3, which means that the price of the product must be $0.25.

Suppose a Competitive Firm in Both the Resource and Product