Question

Suppose a firm is producing 2,475 units of output by hiring 50 workers (W = $20 per hour) and 25 units of capital (R = $10 per hour). The marginal product of labor and marginal product of capital are 40 and 25, respectively. Is the firm minimizing the cost of producing 2,475 units of output?

Answer 1

Answer

given,

firm is producing  = 2,475 units

output by hiring 50 workers W = $20 per hour

25 units of capital R = $10 per hour

marginal product of labor = 40

marginal product of capital = 25

$\dfrac{MP_l}{MP_c}=\dfrac{40}{25}$

$\dfrac{MP_l}{MP_c}=\dfrac{8}{5}$

$\dfrac{W}{R}=\dfrac{20}{10}$

$\dfrac{W}{R}=2$

$\dfrac{MP_l}{MP_c} < \dfrac{W}{R}$

Firm is not minimizing the cost because the firm use more capital and less labor.