Assume a firm produces 500 units of a good by using two inputs, capital and labo

Question

Assume a firm produces 500 units of a good by using two inputs, capital and labor, whose per unit prices are $10 and $4. Assume also that the marginal physical product of the last unit of capital is 30 and the marginal physical product of the last unit of labor is 10. Is this firm minimizing its costs of producing 500 units of output? A. No, because the marginal products of the two inputs are not equal. B. No, because the marginal product ot price ratio for the two inputs are not equal. C. No, because the prices of the two inputs are not equal. D. The answer cannot be determined without more information.

Explanation / Answer

Correct Answer:

B. No, because marginal product to price ratio for 2 inputs are not equal.

Explanation:

Let,

Marginal product of capital = MPk

Marginal product of Labor = MPl

Price of capital = Pk

Price of labor = Pl

Thus, for cost efficiency

MPk/Pk = MPL/PL

Or

MPk/MPL = Pk/Pl

As per the given details in question,

MPk/MPL = 30/10 = 3

Pk/Pl = 10/4 = 2.5

Thus, MPk/MPL is not equal to Pk/Pl.

Or

Marginal product to price ratio for 2 inputs are not equal.

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