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A manufacturing firm’s production function is Q(L, K) = KL + K. Suppose that the price of capital services is equal to $10, and the price of labor services is equal to $50. If the firm wants to maximize profit, how should it allocate its spending between labor and capital?

User Lysanne
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Final answer:

A manufacturing firm should allocate spending between labor and capital to maximize profit by equating the ratio of the marginal product of each input to its price, according to the marginal-productivity theory of input demand.

Step-by-step explanation:

The question asks how a manufacturing firm should allocate its spending between labor and capital to maximize profit, given the production function Q(L, K) = KL + K and the prices of labor and capital services. The firm should make this decision based on the principle of profit maximization, which involves an analysis of the marginal products of labor and capital relative to their costs. Although the information provided does not include full data such as output price or the total budget available for labor and capital, a standard approach for the firm would be to equate the ratio of the marginal product of labor to its price with the ratio of the marginal product of capital to its price, which is the outcome of the marginal-productivity theory of input demand. Without additional information, it is not possible to provide a specific allocation strategy, but the firm should continue to adjust its input mix until the mentioned condition is satisfied, as long as it is also considering other real-world constraints like market demand, input availability, and technology.

User Kiswa
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