Question #271962

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?

1
Expert's answer
2021-11-28T17:54:21-0500

Given that;

marginal product of capital(MPK)=60

marginal product of labor (MPL)=20

wage rate(w)=$2.50\$2.50

price of capital(r)=$6\$6


for a firm employing labor and capital as input then best combination occurs at;


MPLW=MPKr\frac{MPL}{W}=\frac{MPK}{r}


so

MPLW=202.50\frac{MPL}{W}=\frac{20}{2.50}\\\\\\


MPLW=8\frac{MPL}{W}=8


and


MPKr=606\frac{MPK}{r}=\frac{60}{6 }


MPKr=10\frac{MPK}{r}=10


so we can see that


MPLW<MPKr\frac{MPL}{W} <\frac{MPK}{r}\\


8<108<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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