What a firm should do when it produces its desired level of output with a marginal product of labor of 400, its marginal product of capitalism of 1,000, a wage rate of $20, and the rental rate of capitalism of $100.
Answer to Problem 5MCQ
From the available options, the correct option is to employ less capital and more labor.
Explanation of Solution
A firm should employ less capital and more labor because the wage rate is lower than the capital rate. And, when the cost of labor is lower than the cost of capital, then the firm will choose to hire more labor and employ less capital. Whereas, if the firm does not change its allocation or chooses less labor and more capital, then it will become too expensive for the firm to reach its desired level of output.
Therefore, the correct option is d.
Introduction: Labor and capital are the factors of production that a firm used to produce a product in the market.
Chapter 72 Solutions
Krugman's Economics For The Ap® Course
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