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A firm combines two resources, A and B, to produce an output level Q in a...

A firm combines two resources, A and B, to produce an output level Q in a purely competitive market. The cost of a unit of A is $5 and the cost of a unit of B is $12. The marginal revenue product of A is $5 and the marginal revenue product of B is currently $12. What would you recommend that the firm do given this resource combination?

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Answer #1

The marginal revenue product of A is $5

The cost of a unit of A is $5

Ratio of MRP of A and cost of A = $5/$5 = 1

The marginal revenue product of B = $12

The cost of unit of B is $12

Ratio of MRP of B and cost of B = $12/$12 = 1

It can be seen that ratio of marginal revenue product and cost for both inputs, A and B, is same.

Thus,

The firm should keep the resource combination unchanged.

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