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?
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)