Question

Suppose that the price of labor is $7 for a firm, while the price of capital for a firm is $10. Also suppose that the Marginal Product of Labor is 20, while the Marginal Product of Capital is 30. What is the best advice for this profit-maximizing firm?

Answer 1

The best advice for this profit-maximizing firm is:

Use more capital than labor.

Step-by-step explanation:

a) Data and Calculations:

Price of labor = $7

Price of capital = $10

Marginal product of labor = 20

Marginal product of capital = 30

Productivity of labor = Output/Input

= 20/7

= 2.86

Productivity of capital = Output/Input

= 30/10

= 3

b) Capital is more productive than labor. The productivity of capital is 3 when compared to the productivity of labor, that is 2.86.