Question

Suppose that the price of labor (PL) is $7 while the price of capital (PK) is $10. Also, suppose that the marginal product of labor (MPL) is 20 while the marginal product of capital (MPK) is 30. What is the best advice for a profit-maximizing firm ?

Answer 1

The answer is "use more capital, less labor".

Step-by-step explanation:

labor price
`(PL) = \$7\\\\`

Capital price
`(PK) = \$10\\\\`

Marginal product of labor:
`(MPL) = 20\\\\`

Marginal product of capital:
`(MPK) = 30\\\\`

Calculating the ratio of the product marginal labor and labor price:

`= (MPL)/(PL) = (20)/(7) = 2.86\\\\`

Calculating the ratio of the product marginal capital and capital price:

`= (MPK)/(PK) = (30)/(10) = 3\\\\`

The company maximises profit using the quantity of work and capital that matches the necessary responsibilities.

`(MPL)/(PL) = (MPK)/(PK)`

However, in the given case,

`(MPL)/(PL) < (MPK)/(PK)`

In this instance, therefore, the business should raise the quantity of capital and cut the quantity of effort.