The current market wage rate is $10, the rental rate of land is $1,000 per unit,

Question

The current market wage rate is $10, the rental rate of land is $1,000 per unit, and the rental rate of capital is $500. Production managers at a firm find that under their current allocation of factors of production, the marginal revenue product of labor is 100, the marginal revenue product of land is $10,000, and the marginal revenue product of capital is $4,000. Is the firm maximizing profit? Why or why not?

Explanation / Answer

Yes clearly profit is not maximizing. Proof: Product cost> wage rate 100 > 10 mean every labour is bringing 100 dollar by getting only 10 dollars. also marginal revenue product of land > rental rate 10000 > 1000 means that every unit which is costing 1000 dollars is providing 10000 dollars. so clearly firm is profitizing with current labor and land cost.

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