710 section 13 Factor Markets
- A firm currently produces its desired level of output. Its
marginal product of labor is 400, its marginal product of
capital is 1,000, the wage rate is $20 and the rental rate of
capital is $100. In that case, the firm should
a. employ more capital and more labor.
b. employ less labor and less capital.
c. employ less labor and more capital.
d. employ less capital and more labor.
e. not change its allocation of capital and labor.Tackle the Test: Free-Response Questions
- Answer the following questions under the assumption that
firms use only two inputs and seek to maximize profit.
a. Would it be wise for a firm that does not have the
cost-minimizing combination of inputs to hire more of the
input with the highest marginal product and less of the
input with the lowest marginal product? Explain.
b. What is the cost-minimization rule?
c. When a firm hires more labor and less capital, what happens
to the marginal product of labor per dollar and the marginal
product of capital per dollar? Explain.
Answer (5 points)
1 point:No
1 point:The input with the highest marginal product might be much more
expensive than the input with the lowest marginal product, making the marginal
product per dollar higher for the input with the lowest marginal product. When that
is the case, costs would be lower if the firm hired more of the input with the lowest
marginal product (but the highest marginal product per dollar) and less of the input
with the highest marginal product (but the lowest marginal product per dollar.)
1 point:The cost-minimization rule says that firms should adjust their hiring of
inputs to equalize the marginal product per dollar spent on each input.
1 point:The marginal product of labor per dollar decreases and the marginal
product of capital per dollar increases.
1 point:Each factor has diminishing marginal returns. So when more labor is hired,
the marginal product of labor (and thus the marginal product of labor per dollar)
decreases. Likewise, when less capital is hired, the marginal product of capital (and
thus the marginal product of capital per dollar) increases because the units of
capital that are given up had a lower marginal product than those that remain.
- Refer to the table below. Assume that the wage is $10 per day
and the price of pencils is $1.
Quantity of Quantity of
labor (workers) pencils produced
00
140
290
3 120
4 140
5 150
6 160
7 166
a. What is the MPLof the 4thworker?
b. What is the MPLper dollar of the 5thworker?
c. How many workers would the firm hire if it hired every
worker for whom the marginal product per dollar is greater
than or equal to 1 pencil per dollar?
d. If the marginal product per dollar spent on labor is 1 pencil
per dollar, the marginal product of the last unit of capital
hired is 100 pencils per dollar, and the rental rate is $50 per
day, is the firm minimizing its cost? Explain.