Answer the next question(s) on the basis of the following information: Suppose a

Question

Answer the next question(s) on the basis of the following information: Suppose a firm hires both labor (L) and capital (C) under purely competitive conditions. The price of labor is PL and that of capital is Pc. The marginal product of labor is MPL and that of capital is MP c. The firm sells its product competitively at a price of Px. Refer to the above information. If MP d Pc> MP_/P?, the firm: Umay be maximizing profits, but it is not minimizing costs. may be minimizing costs, but it is not maximizing profits. is neither minimizing costs nor maximizing profits. is minimizing costs and maximizing profits.

Explanation / Answer

Under PC, the marginal revenue from the two inputs should be similar for cost minimisation. For profit, if our cost if not getting minimised we can't maximize our profit.

Six option C is correct. Since firm can earn more profit, it it invests in capital.

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