Suppose that a firm has a Cobb-Douglas production function for its inputs of capital and labor. The firm is currently paying $10 per labor hour and $5 per machine hour. The firm is currently at an efficient production level, employing an equal number of machines and workers. Suppose the cost of labor were to double and the cost of capital were to fall by half. If the firm wanted to produce the previous level of output for the previous cost, the firm would hire:
A)more labor and less capital.
B)less labor and more capital.
C)equal amounts of labor and capital.
D)twice as much labor as capital.

Question

Quizplus · Accepted Answer

With the cost of labor doubling and capital cost falling by half, it becomes relatively cheaper to use capital than labor. Therefore, to produce the same level of output at the previous cost, the firm should hire less labor and more capital.

Suppose That a Firm Has a Cobb-Douglas Production Function for Its