Assume a firm is currently employing 20 units of capital and 100 units of labor

Question

Assume a firm is currently employing 20 units of capital and 100 units of labor in its production process. Assume also that the marginal product of the 20th unit of capital is 40 units of output, the marginal product of the 100th unit of labor is 10 units of output and the per unit prices of capital and labor are $20 and $10, respectively. In this case, in order to minimize its costs of production the firm should:

hire more capital and less labor.

hire more labor and less capital.

hire less capital and less labor.

hire more capital and more labor.

Explanation / Answer

Answer A ---Hire more capital and less labour

We know that cost minimization is the most important objective of a firm. The firm always uses the production with the less cost and more profit. The cost minimization they can uses two inputs. Labour and Capital. Both have the production value. That is Labour for Wages and Capital for Real rental price.

In thiis case The marginal product of capital is higher than the marginal product of labour. That is 20Th unit of capital produces 40 units of output. and 100th unit of labour produces 10 units of outputs. That means the the additional unit( Marginal product) Is higher in Capital. So for the cost minimization they ca better use Capital than labour.

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