Suppose in the long run, for a firm, the marginal product of labor is 100, the m

Question

Suppose in the long run, for a firm, the marginal product of labor is 100, the marginal product of capital is 120. The wage rate (per unit of labor) is W = 20, and the rental price (per unit of capital) is R = 24. Then which of the following is true?




A. If the resource prices do not change, the firm should maintain the current levels of labor and capital.

B. If the resource prices become W = 25, and R = 35, the firm should use more labor and less capital.

C. If the resource prices become W = 24, and R = 28, the firm should use more labor and less capital.

D. Only A and B.

E. Only A and C.

Explanation / Answer

Let's look at A. Efficiency implies: MPL/w = MPK/r According to the given information 100/20 = 120/24 5 = 5 So, the firm is allocating resources efficiently as long as it is using all its resources. A is correct. If the prices do not change (and the MPL and MPK do not change) the firm should keep on doing what it's doing. Let's look at B. 100/25 > 120/35 4 > 3.428 Therefore, MPL/w > MPK/r so the firm should use more labor and less capital. B is correct. Let's look at C. 100/24 < 120/28 4.166 < 4.285 Therefore, MPL/w

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