If a firm could increase profits by hiring less labor and more capital, then
A) the last dollar spent on labor must yield a smaller increase in output than the last dollar spent on capital.
B) the last dollar spent on labor must yield a larger increase in output than the last dollar spent on capital.
C) the price of labor exceeds the price of capital.
D) the optimal production technique must be capital intensive.

Question

Quizplus · Accepted Answer

If a firm can increase profits by hiring less labor and more capital, then it must be the case that the last dollar spent on labor does not yield as much output as the last dollar spent on capital. In other words, the marginal product of capital is higher than the marginal product of labor. This indicates that the optimal production technique is capital intensive, and the firm should use more capital and less labor to maximize profits.

If a Firm Could Increase Profits by Hiring Less Labor