Question

You own a farm, you hire labor and capital to produce apples. The marginal product of the last unit of labor input is 15 and the marginal product of the last unit of capital input is 45. The market wage for labor is $8. If you are using the optimal combination of inputs, then the price of capital is

Answer 1

$24

Step-by-step explanation:

We can say the Optimal combination of inputs can be expressed as the ratio of marginal productivity of labor to the marginal productivity of capital is equal to the ratio of price of labor(wage) to the price of capital(RENT).

Lets denote:

marginal productivity of labor = MPL

marginal productivity of capital = MPC

Wage= W

Rent= R

Then the formula will be

`(MPL)/(MPC)=(W)/(R)`

Workings:

Lets put in the values in the formula

`(15)/(45) = (8)/(R)`

We have to find out R(Rent)

R= 8x3

R= $24