Question

if the marginal product of capital of a firm is 120unit of output, rental price of machine is $30. and marginal product of labor is 40units of output, daily wages is $20.

1)why is this firm not maximizing output or minimizing cost in long run??

2)how can the firm max. output or min. cost?

Answer 1

The firm could fire one worker -- production goes down by 40 and use the savings to buy $20 worth of capital -- output goes up by 80, for an overall net gain of 40.

Profit is maximized when MPk/Pk=MPl/Pl
(MP - is marginal product, P is the input price)

Answer 2

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