Question

In each of the following four cases, MRP L and MRP C refer to the marginal revenue products of labor and capital, respectively, and P L and P C refer to their prices. Indicate in each case whether the conditions are consistent with maximum profits for the firm. If not, state which resource(s) should be used in larger amounts and which resource(s) should be used in smaller amounts.

a. MRPL = $8; PL = $4; MRPC = $8; PC = $4
1. These conditions are consistent with maximum profits for the firm.
True or False
2. Which resource should be used in larger and/or smaller amounts?
i- Use less of both
ii- Conditions are already consistent
iii- Use more of both
iv- Use less labor and more capital
v- Use more labor and less capital

Answer 1

1. It is true that these conditions are consistent with maximum profits for the firm.

2. The correct option is ii- Conditions are already consistent.

Step-by-step explanation:

1. These conditions are consistent with maximum profits for the firm. True or False

Under the profit maximization theory for two or more inputs, profit is said to be maximized by a firm when the ratios of the marginal products to cost per unit of each input are equal to each other. For this question, this implies that when we have:

MRPL / PL = MRPC / PC ...................... (1)

From the question, we have:

MRPL / PL = $8 / $4 = 2

MRPC / PC = $8 / $4 = 2

These imply that equation (1) holds as follows:

MRPL / PL = MRPC / PC = 2

Therefore, it is true that these conditions are consistent with maximum profits for the firm.

2. Which resource should be used in larger and/or smaller amounts?

The correct option is ii- Conditions are already consistent.

This implies that there is no need to change the amount of any of the two goods since the conditions are already consistent with maximum profits for the firm.