A firm is currently hiring capital and labor so that MPL/PL

Question

A firm is currently hiring capital and labor so that MPL/PL < MPK/PK, if the firm wishes to maximize profits it should hire
A) less labor and less capital.
B) more capital and more labor.
C) more labor and less capital.
D) less labor and more capital.

Quizplus · Accepted Answer

When MPL/PL < MPK/PK, it means that the marginal product of labor is less than the marginal product of capital relative to their costs. This implies that the firm is using too much labor and not enough capital, causing inefficiency in production. To maximize profits, the firm should reduce its labor and increase its capital until the marginal product of labor equals the marginal product of capital relative to their costs, which is when MPL/PL = MPK/PK. Therefore, the best choice is to hire less labor and more capital, as in option D.

A Firm Is Currently Hiring Capital and Labor So That