Answer:
The manager should hire <u>more labor</u> and <u>rent less capital</u>.
Explanation:
Given:
MPL = Marginal product of labor units per hour = 5
MPC = marginal product of capital units per machine = 40
PL = Wage per hour = $20, or 20
PC = Rental price of capital per machine = $120, or120
Po = Price of output per unit = $5
The condition for the profit maximization for a firm is as follows:
MPL / PL = MPC / PC ……………………………. (1)
From equation (1), we have:
MPL / PL = 5 / 20 = 0.25
MPC / PC = 40 / 120 = 0.33
Since 0.25 = MPL / PL < MPC / PC = 0.33, it implies that these conditions are NOT consistent with equation (1).
In order to maximize profit, more labor should be hired while less capital should be rented until these conditions are consistent with equation (1).
Therefore, we have:
To maximize profit, the manager should hire <u>more labor</u> and <u>rent less capital</u>.
