A firm is using 20 units of capital and 100 units of labor to produce 1,000 unit

Question

A firm is using 20 units of capital and 100 units of labor to produce 1,000 units of output. Capital costs $150 per unit and labor $20 per unit. The last unit of capital added 50 units of output, while the last unit of labor added 10 units of output. The firm

a. is using the cost?minimizing combination of capital and labor.

b. should use more of both inputs in equal proportions.

c. should use less of labor and more of capital for cost minimization.

d. could produce the same level of output at a lower cost by using more labor and less capital.

Explanation / Answer

Correct option (D)
could produce the same level of output at a lower cost by using more labor and less capital- is correct..
Cost minimising condition- MP of L / MP of K = W/r
MP= marginal product , MP of L= 10, MP of K = 50
W = wage rate or price of labor = 20
r = price of capital = 150
MP of L / MP of K = 10/50 = 0.2---------------A
W/r = 20/150 = 0.14-----------------------B
Since A is greater than B firm can produce more by hiring more labor and less capital.

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