A company uses 20 work units and 30 units of capital to produce 4,000 units of p
ID: 1193392 • Letter: A
Question
A company uses 20 work units and 30 units of capital to produce 4,000 units of product. In this combination the marginal product of labor is 50 and the marginal product of capital is 40. The price of labor is $ 30 and the price of capital is $ 20.
The MP per dollar of work is _____ and MP per dollar of capital is _____.
The company can raise capital by one unit and reduce _________ units work by keeping costs constant. This ____________ (increases, decreases) the production by _________units.
To maximize production by the cost pointed the company must increase __________ and reduce ____________ until the MRTS is equal to w / r.
Explanation / Answer
The MP per dollar of work is 1.67 (=50/30) and MP per dollar of capital is 2 (=40/20).
The company can raise capital by one unit and reduce 0.67 (=20/30) units work by keeping costs constant. This increases the production by 6.67 [=40 - 0.67(50)] units.
The MP per dollar of work is less than the MP per dollar of capital. Therefore, to maximize production by the cost pointed the company must increase capital and reduce labor until the MRTS is equal to w / r.
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