Chapter 72, Problem 1FRQ

a)

To determine

Whether it is wise for a firm to hire more of the input with the highest marginal product and less of the input with the lowest marginal product when it does not have the cost-minimizing combination of inputs.

Explanation of Solution

The hiring of input with the highest marginal product would not be prudent for the company because it would be more expensive than recruiting input with the lowest marginal product. Additionally, the marginal product per dollar is poor with this hiring.

By hiring more of the inputs with lower marginal products, which results in higher marginal products per dollar, and by hiring fewer of the inputs with higher marginal products, which produce lower marginal products per dollar, the company can reduce costs.

Economics Concept Introduction

Introduction: The change in extra output caused by adding one additional unit of the input factor to the current factors of inputs, such as labor and capital, is referred to as the marginal product of an input or a factor of input.

b)

To determine

The cost-minimization rule

Explanation of Solution

The cost-minimization rule states that businesses can modify their input hiring practices to equalize the marginal product per dollar spent for each input unit in order to save costs. The cost-minimization rule primarily assists the company in maximizing profits and ensuring the output level at the lowest cost. It is calculated by dividing the marginal product of labor by the wage of labor, which is equal to the marginal product of capital by the cost of capital or capital rental price.

Economics Concept Introduction

Introduction: The change in extra output caused by adding one additional unit of the input factor to the current factors of inputs, such as labor and capital, is referred to as the marginal product of an input or a factor of input.

c)

To determine

The marginal product of labor per dollar and the marginal product of capital per dollar when a firm hires more labor and less capital.

Explanation of Solution

The marginal product of labor per dollar would fall and the marginal product of capital per dollar would rise if a firm hired more labor and less capital because the marginal return would start to fall with the addition of more units of factor.

As a result, increasing employment would result in a lower marginal return and lower marginal product of labor per dollar.

Because the units of capital that are sacrificed have a lower marginal product than the units of capital that remain, renting less capital would also result in an increase in the marginal product of capital, which would increase the marginal product of capital per dollar. Therefore, the marginal product of capital per dollar would rise by renting less capital.

Economics Concept Introduction

Introduction: The change in extra output caused by adding one additional unit of the input factor to the current factors of inputs, such as labor and capital, is referred to as the marginal product of an input or a factor of input.