Answer to Question #83907 in Microeconomics for ahmed

Question

Consider Peter’s Pizza Place. Peter needs to know if he is optimizing cost in handling his inputs of capital and labour. This is what he sees: (5)

Marginal Product of Capital 3,200 pizzas/oven
Marginal Product of Labour 1,400 pizzas/worker
Wage Rate $280/week
Rental Price of Ovens $800/week

Using this information, find out if Peter is optimizing his costs and if he is not, then how should he reallocate his factors of production?

Answer 1

Cost optimization condition is:

MPL/w = MPk/r,

1400/280 = 3200/800,

5 = 4, so Peter is not optimizing his costs and he should reallocate his factors of production and use more units of capital and less units of labour.