In the long run,a profit-maximizing firm will select capital and labor so that
A) the marginal product of labor equals the marginal product of capital.
B) the wage divided by the marginal product of labor equals the rental cost of a unit of capital divided by the marginal product of capital.
C) labor equals capital.
D) the wage equals the rental cost of a unit of capital.

Question

Quizplus · Accepted Answer

In order to maximize profits, a firm will continue to hire labor and/or capital until the marginal cost of production equals the marginal revenue of the goods produced. In the long run, this means that the firm will equate the wage rate (for labor) to the marginal product of labor divided by the price of the output, and the rental rate (for capital) to the marginal product of capital divided by the price of the output. Therefore, the firm will select capital and labor so that the wage divided by the marginal product of labor equals the rental cost of a unit of capital divided by the marginal product of capital.

In the Long Run,a Profit-Maximizing Firm Will Select Capital and Labor