A manager hires labor and rents capital equipment in a very competitive market. Currently, the...

Question:

A manager hires labor and rents capital equipment in a very competitive market. Currently, the wage rate is $10/hour and the capital rental price is $5/hour. If the marginal product of labor is 50 units of output per hour and the marginal product of capital is 40 units of output per hour, is the firm using the cost-minimizing combination of labor and capital? If not, should the firm increase or decrease the amount of capital (labor) used in its production process?

Optimum utilization of factor combinations

Suppose a producer uses two factors of production in the production process: Labor (L) and Capital (K). The total production can be maximized at the point where, Marginal Rate of Technical Substitution of L and K (MRTS of L and K) = Wage / Rent.

Answer and Explanation: 1

Become a Study.com member to unlock this answer!

View this answer

given, w = 10 , r = 5

The cost minimization rule is,

MRTS of L and K = w / r, or

MP of L / MP of K = w / r

Here, MP of L / MP of K = 50 / 40 =...

See full answer below.


Learn more about this topic:

Loading...
Marginal Rate of Substitution: Definition, Formula & Example

from

Chapter 3 / Lesson 51
43K

Learn how to calculate the marginal rate of substitution and its application in economics. View examples of the formula in use with real world application.


Related to this Question

Explore our homework questions and answers library