Question

A manager hires labor and rents capital equipment in a very competitive market. Currently the wage rate is $12 per hour and capital is rented at $8 per hour. If the marginal product of labor is 60 units of output per hour and the marginal product of capital is 45 units of output per hour, should the firm increase, decrease, or leave unchanged the amount of capital used in its production process

Answer 1

Answer:

The firm should decrease the amount of capital used.

Explanation:

The wage rate is $12 per hour and capital is rented at $8 per hour.

The marginal product of labor is 60 units of output per hour and the marginal product of capital is 45 units of output per hour.

A manager hires labor and rents capital equipment in a very competitive market.

The ratio of marginal product of labor and wage rate

= $\frac{60}{12}$

= 5

The ratio of marginal product of capital and rent

= $\frac{45}{8}$

= 5.625

Since the ratio is greater for capital, it means that the manager should decrease the amount of capital used in the production process.