Max employs both labor and capital to produce his products. Currently the last u

Question

Max employs both labor and capital to produce his products. Currently the last unit of labor employed has a marginal product of 15 units. The last unit of capital employed has a marginal product of 40 units. The price of labor is #3 per unit and the price of capital is $10 per unit. If Max is going to find the least-cost combo of labor and capital he needs to ____ his employment of labor and _____ his employment of cappital.

a. maintain, maintain

b. decrease, increase

c. decrease, decrease

d. increase, increase

e. increase, decrease

Can you please explain why the answer is the correct one?

Explanation / Answer

Cost minimizing combination of labor and capital is where:

MRS = Price of labor / Price of capital

Marginal product of labor / Marginal product of capital = 3/10

15/40 = 3/10

3/8 = 3/10

3/8 > 3/10 so units of labor will be increased while units of capital will be decreased.

This will make MRS = Ratio of price level

e) increase, decrease

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