Question

Suppose that the price of labor (PL) is $7 while the price of capital (PK) is $10. Also, suppose that the marginal product of labor (MPL) is 20 while the marginal product of capital (MPK) is 30. What is the best advice for a profit-maximizing firm ?

Answer 1

Answer:

The answer is "use more capital, less labor".

Explanation:

labor price $(PL) = \ 7$

Capital price $(PK) = \ 10$

Marginal product of labor: $(MPL) = 20$

Marginal product of capital: $(MPK) = 30$  

Calculating the ratio of the product marginal labor and labor price:

$= \frac{MPL}{PL} = \frac{20}{7} = 2.86$

Calculating the ratio of the product marginal capital and capital price:

$= \frac{MPK}{PK} = \frac{30}{10} = 3$

The company maximises profit using the quantity of work and capital that matches the necessary responsibilities.

$\frac{MPL}{PL} = \frac{MPK}{PK}$

However, in the given case,

$\frac{MPL}{PL} < \frac{MPK}{PK}$

In this instance, therefore, the business should raise the quantity of capital and cut the quantity of effort.