Answer to Question #155743 in Microeconomics for Kajol

Question

Suppose a firm is currently using 1000 laborers and 650 units of capital to produce its product. The wage rate is Rs. 50, and the price of capital is Rs. 260. The labourer adds 50 units to total output, while the last unit of capital adds130 units to total output. Is the manager of this firm making the optimal input choice? Why or why not? If not, what should the manager do?

Answer 1

The manager of this firm does not choose the optimal input, since the cost of a unit of capital use is much higher than the value that capital adds to the cost of a unit of output. There are two ways for a manager to go. In the first case, reduce the cost of using capital, that is, revise the production flow chart. The second way is to increase capital gains. For this, it is necessary to research sales markets.