Suppose a firm finds that the marginal product of capital is 60 and the marginal product of labor is 20. If the price of capital is $6 and the price of labor is $2.50, describe how the firm should adjust its mix of capital and labor? What will be the result?
Given that;
marginal product of capital(MPK)=60
marginal product of labor (MPL)=20
wage rate(w)="\\$2.50"
price of capital(r)="\\$6"
for a firm employing labor and capital as input then best combination occurs at;
"\\frac{MPL}{W}=\\frac{MPK}{r}"
so
"\\frac{MPL}{W}=\\frac{20}{2.50}\\\\\\\\\\\\"
"\\frac{MPL}{W}=8"
and
"\\frac{MPK}{r}=\\frac{60}{6\n}"
"\\frac{MPK}{r}=10"
so we can see that
"\\frac{MPL}{W} <\\frac{MPK}{r}\\\\"
"8<10"
To attain the best input mix , the firm should hire more labor and hire less capital so that marginal product of labor increases and marginal product of capital reduces until the equilibrium
is attained.
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