Assume that a firm uses labor and capital to produce a product. The firm hires l

Question

Assume that a firm uses labor and capital to produce a product. The firm hires labor at a wage rate of $4 per unit and rents capital at $5 per unit. At its current output level, the marginal physical products of labor and capital are 20 and 30 units, respectively. To minimize its cost of production without changing the level of output, the firm should a.) make no changes b.) hire more labor and rent more captital c.) hire less labor and rent more capital d.) hire more labor and rent less capital Hire less labor and rent less capital

Explanation / Answer

As per the question: The firm hires labor at a wage rate of $4 per unit and rents capital at $5 per unit. At its current output level, the marginal physical products of labor and capital are 20 and 30 units, respectively.

Hence we conclude that the marginal physical product per dollar spent is as follows:

1) By spending $1 on labor we get = 20/4 = 5 units of output.

2) By spending $1 on capital we get = 30/5 = 6 units of output.

The profitability can increase if we invest more in capital and less in labor.

Hence, the correct answer is option C = Hire less labor and rent more capital.

Hope my solution solves your query.

Regards

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