Question

Suppose that the marginal product of the last worker employed by a firm is 100 units of output per day and the daily wage that the firm must pay is $20, while the marginal product of the last machine rented by the firm is 100 unites per day and the daily rental price of the machine is $40. Why is this firm not maximizing output or minimizing costs in the long run

Answer 1

Step-by-step explanation:

This firm is not maximizing output or minimizing cost in the long run because the condition for maximizing output is the same as the condition for minimizing costs,the firm would be producing at minimum cost if; MPL/w = MPK/r

The marginal product of labor is 100 units per day, for which they are paying a wage of $20 per day, therefore they will be paying $0.20 per unit for marginal product of labor

MPL/w= 20/100=$0.20 per unit

Since their marginal product of capital is 100 units per day, for which they are paying rent r of $40 per day, therefore they will be paying $0.40 per unit for marginal product of capital:

MPK/r = 40/100 = $0.40 per unit

In order for any firm to maximizing output for fixed cost or minimizing cost for fixed output, the price you pay for a given amount of marginal product will be the same. So if they were maximizing profit, they would be paying the same rate for marginal product of capital as for marginal product of labor.