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Marginal Product per Labor, Marginal Product per Capital

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This is a 4 part question:

A manufacturer is hiring 20 units of labor and 6 units of capital (bundleA). The price of labor is $10 and the price of capital is $2 and at A the marginal products of labor and capital are both equal to 20.

1.Beginning at A if the manufacturer increases labor by 1 unit and decreases capital by 1 unit, what will happen to cost and output?

Cost remain constant & output rises by 20 units
Cost remain constant & output lowers by 20 units
Output remains constant & cost increase by $8
Output remains constant & cost lowers by $8
Both cost and output remain constant

2.Beginning at A, if the manufacturer raises expenses on labor by $1 and lowers expenses on capital by $1, which is True?

Output per $ spent will rise
Output per $ spent will lower
MP of labor will eventually rise and MP of capital will eventually fall
MP of labor will eventually rise and MP of capital will remain constant
Or none of these

3.The manufacturer

is using optimal combination of capital and labor
should use more labor and less capital
should use more capital and less labor
need more information to determine

4.In equilibrium

MPL will be less than 20
MPK will be more than 20
MPK=MPL
MPL will be 5 times MPK
Or the first 2 listed above

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Solution Summary

This is a step by step solution that calculates the effect of different combinations of labor and capital on cost and output.
The solution addresses the question starting with: A manufacturer is hiring 20 units of labor and 6 units of capital (bundleA). The price of labor is $10 and the price of capital is $2 and at A the marginal products of labor and capital are both equal to 20.

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Total Cost of Labor = 20 × $10 = $200
Total Cost of Capital = 6 × $2 = $12

Total Cost = $212

1)Beginning at A if the manufacturer increases labor by 1 unit and decreases capital by 1 unit, what will happen to cost and output?

Total Cost of Labor = 21 × $10 = $210
Total Cost of Capital = 5 × $2 = $10

Total Cost = $220

Since 1 unit of Labor is exchanged for 1 unit of Capital, and since the MP of labor = 20, and MP of Capital = 20, then the MP of both labor and capital would remain unchanged, while cost would increase by ...

Solution provided by:
Manal Elkhoshkhany, MBA
Education
  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
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