At its current level of production and input employment, a firm's marginal products of labor and capital are 5 units of output. The market wage is $10 per unit of labor and the price per unit of capital is $25. The firm could increase its profits by
A) hiring more labor and less capital.
B) hiring more capital and less labor.
C) hire less capital and less labor.
D) making no changes since it is already employing the profit maximizing combination of inputs.

Question

Quizplus · Accepted Answer

The firm should hire more labor and less capital because the marginal product per dollar spent on labor (5/10 = 0.5) is greater than the marginal product per dollar spent on capital (5/25 = 0.2).

At Its Current Level of Production and Input Employment, a Firm's