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1. A manager of a perfectly competitive firm observes that the marginal product of labor is 5 units per hour, the marginal product of capital is 40 units per machine, the wage is $20 per hour, the rental price of capital is $120 per machine, and the price of output is $5 per unit. Please complete the following statement. To maximize profit, the manager should hire and

Need help, please show work. Answer options for first blank (More labor, or less labor), options for the second are (more capital, or the same capital).

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Answer #1


In order to maximize profit, a perfectly competitive firm hires labor up to that point at which marginal revenue product of labor equals the wage rate.

Marginal revenue product of labor = marginal product of labor * Price of output

Marginal revenue product of labor = 5 * $5 = $25

Wage rate = $20 per hour

Since, marginal revenue product of labor is greater than the wage rate, firm should hire more labor.

In order to maximize profit, a perfectly competitive firm hire capital up to that point at which marginal revenue product of capital equals the wage rate.

Marginal revenue product of capital = marginal product of capital * Price of output

Marginal revenue product of capital = 40 * $5 = $200

Rental price of capital = $120 per hour

Since, marginal revenue product of capital is greater than the rental price of capital, firm should hire more capital.

Thus,

To maximize profit, the manager should hire more labor and more capital.

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