A firm is employing 100 units of labor and 50 units of capital to produce 200 widgets. Labor costs Rs.10 per unit and capital Rs.5 per unit. For the quantities of inputs employed, MP = 2 and MP = 5. In this situation, the firm
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A firm is employing 100 units of labor and 50 units of capital to produce 200 widgets. Labor costs Rs.10 per unit and capital Rs.5 per unit. For the quantities of inputs employed, MP _L = 2 and MP _K = 5. In this situation, the firm (A) is producing the maximum output possible given the prices and relative productivities of the inputs. (B) could lower its production costs by using more labor and less capital. (C) could increase its output at no extra cost by using more capital and less labor. (D) should use more of both inputs in equal proportions.
Production and returns to scale has come up 92 times in 6 exams since 2007.
This question is on Producer equilibrium and the expansion path, part of Production and returns to scale in Microeconomics.
The least-cost mix of inputs at given prices and how it moves as output grows.
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Question from the UoH 2010 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.