Question

Assume that a perfectly competitive firm faces a fixed wage rate of​ $4 and a constant​ per-unit cost of capital of​ $2. If the marginal product of labor and capital are 16 and​ 6, respectively, then to maximize profits the firm should ______.

Answer 1

The correct answer to the following question is that a perfectly competitive firm should use relatively less capital .

Step-by-step explanation:

Here we will take out the ratio for marginal product of labor by capital and for wage rate and per unit cost of capital.

Marginal product for labor by capital = 16 / 6

= 2.6666

Wage rate per unit cost of capital = $4/$2

= 2

Now in this situation where Marginal product for labor by capital is greater than Wage rate per unit cost of capital, this indicates that the labor should be used in more quantity and less of capital should be used, which in turn would reduce the marginal product for labor and increase the marginal product for capital.