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

Optimum combination must have a total product = 192 and MPP/Price should be same for both inputs. This implies the optimum combination has 3 units of capital (producing 60 units) and 4 units of labor (producing 132 units) and thus both have MPP/Price = 3

This implies 3 units of capital and 4 units of labor is optimum. Cost minimizing and profit maximizing input combination is same when q = 192. Profit is 192*1 - (5*3 + 8*4) = $145.

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