Chapter 72, Problem 6MCQ

To determine

What a firm should do when it produces its desired level of output with a marginal product of labor 10, a marginal product of capital of 50, a wage rate of $20, and the rental rate of the capital of $100.

Answer to Problem 6MCQ

From the available options, the correct option is to employ less capital and more labor.

Explanation of Solution

A firm should employ less capital and more labor because the marginal product of capital is larger than the labor and increasing labor should be favorable for the firm. The marginal returns on capital will start to diminish with the high capital rate and the wage rate is lower than the capital rate. And, when the cost of labor is lower than the cost of capital, then the firm will choose to hire more labor and employ less capital. Whereas, if the firm does not change its allocation or chooses less labor and more capital, then it will become too expensive for the firm to reach its desired level of output.

Therefore, the correct option is d.

Economics Concept Introduction

Introduction: Labor and capital are the factors of production that a firm used to produce a product in the market.