Question

You are an efficiency expert hired by a manufacturing firm that uses K and L as inputs. The firm produces and sells a given output. If w = $40, r = $100, MPL = 4, and MPK = 40 the firm:_______
A) is cost minimizing.
B) should use less L and more K to cost minimize.
C) should use more K and less L to cost minimize.
D) is profit maximizing but not cost minimizing.

Answer 1

Answer:

Option C is correct

Explanation:

For equilibrium condition to apply

MPl/w = MPK/r where mpl=4, MPK = 40 and r= 100

That is dollar spent on capital Change in output should be equal to change in out put for extra dollar spent on labour.

So therefore:

4/40 = 4/100

Since average return from capital is more so firm needs more capital and less labour to meet equilibrium condition that is MPL/w is equal to MPK/r.

Option C is the right one