Question

To maximize profits, firms produce an output where marginal product of labor per dollar equals the marginal product of capital per dollar. Assume that the cost of labor is $20 an hour and its marginal product is 40. What should the marginal product of capital be if we assume the cost of capital of $40 an hour?

Answer 1

$80

Step-by-step explanation:

In this company, every dollar spent in labor has equal marginal product than every dollar spent in capital.

If we spent an additional $20 in labor and the marginal product output is $40, it is a 1:2 relationship (for every dollar spent in labor we get $2 of product output).

If the company spends $40 in capital, if it has the same marginal product output as labor (1:2 relationship), then its marginal product output will be $80.