A firm is using 500 units of labor and 100 units of capital to produce 100 units

Question

A firm is using 500 units of labor and 100 units of capital to produce 100 units of output. Labor costs $5 per unit and capital $20 per unit. At these input levels, another unit of labor adds 5 units of output, while another unit of capital adds 40 units of output. If the firm uses 496 units of labor and 101 units of capital instead, what will happen? 1) Cost will be unchanged, and output will increase by 20 units. 2) Cost will be unchanged, and output will increase by 35 units. 3) Output will be unchanged, and cost will decrease by $20. 4) Output will be unchanged, and cost will decrease by $40.

Explanation / Answer

A firm is using 500 units of labor and 100 units of capital to produce 100 units of output. Labor costs $5 per unit and capital $20 per unit. At these input levels, another unit of labor adds 5 units of output, while another unit of capital adds 40 units of output. If the firm uses 496 units of labor and 101 units of capital instead, what will happen?
Cost will be unchanged, and output will increase by 20 units.
Cost will be unchanged, and output will increase by 35 units.
Output will be unchanged, and cost will decrease by $20.
Output will be unchanged, and cost will decrease by $40.

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