Answer to Question #226757 in Microeconomics for Javeria Abrar

Question

The wage rate of labor is Rs. 6 and price of capital is Rs. 2. The marginal product of labor is 16 while marginal product of capital is 4. Can a firm be operating at equilibrium?       

Answer 1

Solution:

A firm will operate at equilibrium where: $\frac{MP_{L} }{P_{L} } = \frac{MP_{K} }{P_{K} }$

 

The equilibrium point is the point at which the firm is producing the maximum amount of output at a given cost.

MP_L = 16

P_L = 6

MP_K = 4

P_K = 2

At equilibrium: $\frac{16 }{6 } = \frac{4 }{2 }$

At equilibrium: 2.67 = 2

$\frac{MP_{L} }{P_{L} } > \frac{MP_{K} }{P_{K} }$

The firm is not operating at equilibrium since $\frac{MP_{L} }{P_{L} } > \frac{MP_{K} }{P_{K} }$, that is they are not equal, which shows that the marginal benefit of additional labor exceeds the marginal cost of capital.