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)=
price of capital(r)=
for a firm employing labor and capital as input then best combination occurs at;
so
and
so we can see that
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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