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Cost Minimizing Combination of Labor and Capital

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A manager hires labor and rents capital equipment in a competitive market. The current wage is $6.00 per hour and capital is rented at $12.00 per hour. If the marginal product of labor is 50 units of output per hour and the marginal product of capital is 75 units of output per hour, is the firm using the cost-minimizing combination of labor and capital? If not, should the firm increase or decrease the amount of capital used in its production process?

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Solution Summary

This solution analyzes if a firm is using the cost-minimizing combination of labor and capital.

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Cost per additional unit produced = cost of additional production unit per hour/marginal production level per hour for that unit
This formula tells you how much it will cost the firm to produce an ...

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