Question

A firm has to choose between two technologies; both produce same output with one being labor intensive and other being capital intensive. The firm will use labor intensive technology when _________________.

Answer 1

Answer:

The firm will use labor intensive technology when the marginal product of using  labor intensive technology is greater than the marginal produce of capital intensive technology

Explanation:

Marginal product is the change in total product when the amount of input used in changed by 1 unit

When choosing which form of technology to use, a firm would choose the technology that yields the highest marginal product

For example, imagine a firm can choose between using labour or capital in its production. When labour is increased frim 10 to 20 units, output increase from 100 to 500 units

when capital is increased frim 10 to 20 units, output increase from 100 to 200 units

Marginal product of labour = 500 - 100 / ( 20 - 10) = 40

Marginal product of capital = (200 - 100) / (20 - 10) = 20

Marginal product of labour is higher than the Marginal product of capital. the firm should be labour intensive