Answer to Question #152742 in Economics for medo

Question

Suppose a firm is currently using 500 laborers and 325 units of capital to produce
its product. The wage rate is $25, and the price of capital is $130. The last laborer adds
25 units to total output, while the last unit of capital adds 65 units to total output. Is
the manager of this firm making the optimal input choice? Why or why not? If not,
what should the manager do?

Answer 1

$$TC=500\times25+325\times130=54,750$$

Since the last worker adds 25 units to the total output, that is, the ratio of the additional unit of wages to the additional output is 1, while the last unit of capital adds 65 units to the total output, which is half of the cost of the additional unit of capital, this choice made

the manager of this firm is not the optimal entry. The manager needs to consider increasing the efficiency of capital use.