Question

If the marginal product of labor is 2, the marginal product of capital is 4, the wage rate is INR 3, the rental price of capital is INR 6, and the price of output is INR 1.50, then the firm should

• A. Increase output by hiring more labor, more capital, or both
• B. Hold output constant, but hire more labor and less capital
• C. Decrease output by reducing the quantity of capital, reducing the number of units of labor, or both
• D. None of the above is correct

Answer 1

The correct option is D

None of the above is correct

Cost of hiring one additional unit of labour = Rs 3
Revenue from hiring an additional unit of labour
= MP of labour x price = Rs 3

Cost of renting one additional unit of capital = Rs 6
Revenue from renting an additional unit of capital
= MP of capital x price = Rs 6

Hence, there is no benefit in increasing labour or capital.