Profit maximization implies that firms will want to ________.
A)accumulate labor while the MPL is greater than the real wage
B)accumulate capital while the MPK is greater than the rental price of capital
C)not accumulate either input without limit,because of diminishing returns to each factor
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

Profit maximization involves the optimization of both labor and capital inputs to achieve the highest possible level of profit. This means that firms will want to accumulate labor while its marginal productivity is higher than the real wage, and accumulate capital while its marginal productivity is greater than the rental price of capital. However, firms will not continue to accumulate either input without limit because of the law of diminishing marginal returns, which states that the marginal output of each additional unit of input will eventually decrease. Therefore, option D, which includes all of the above statements, is the correct answer.

Profit Maximization Implies That Firms Will Want to ________