Question

18/21 Answer questions 18 to 21 on the basis of the following information. The current wage rate per hour is $10 and the rental rate of capital is $500 per hour. A firm's marginal product of labor per hour is 200 units and its marginal product of capital per hour is 20,000 units. 18. The last dollar spent on labor will produce how many units of output per hour? 19. Is the business using the right combination of labor and capital to produce its product at the lowest cost? 20. To produce its output at the lowest cost, what adjustment should the business perform to its labor and capital combination? 21. What rule must the company obey to achieve the lowest cost of production?

Answer 1

18) MPL/w = 200/10 = 20 units of output per hour

19) MPK/r = 20000/500 = 40 units of output per hour

No, the business is not using the right combination of labour and capital.

20) The business should use more of capital and less of labour to produce output at lowest cost.

21) inputs should be used such that:

MPL/w = MPK/r for lowest cost production

(The inputs must be adjusted to achieve the equality above for this purpose)