The productivity of capital and labor are as shown in the table below. The outpu

Question

The productivity of capital and labor are as shown in the table below. The output of these resources sells in a purely competitive market for $1 per unit. Cost of capital is $5 and cost of labor is $8. Use this information in answering question 1 through 5. MPP Capital MPP Capital Units of Labor MPP Labor MPP Labor Units of Capital 0 P Capital P Labor 0 40 25 20 15 10 4.5 36 32 24 20 16 2.5 5 0.4 6 0.2 The least cost combination of capital and labor for this firm to use in producing 192 units of output is? units of capital 2 _units of labor The profit maximizing combination of capital and labor is: units of capital units of labor 4. 5. The amount of economic profit is

Explanation / Answer

Ans 1. 1 units of capital and 1 units of labor

At Cost minimizing combination RTS= w/v where RTS= MPLl/MPLk

here w/ v = 8/5 and RTS equals 8/ 5 at 1 units of capital and labor where MPLl =40 MPLk = 25

Thus RTS= 40/25= 8/5 = w/v

Ans 2. 1 unit of capital and 1 unit of labor

Since cost minimization implies profit maximisation therefore the input combination where cost is minimized is also profit maximisation input combination

Ans 3. Profit = p *q - lw- vk

= 1*192 - 1*8- 1*5

   = $ 179

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