hi
new to economics, and struggling with some of its concepts. got this posed as a homework question, and i have to admit stumped as how to begin.
Suppose a firm finds that the marginal product of capital is 60 and the marginal product of labor is 20. If the price of capital is $6 and the price of labor is $2.50, describe how the firm should adjust its mix of capital and labor? What will be the result?
do i start with a total product cure or try and plot the variable and fixed costs.
any guidance would be great
Hi! I can help you with your economics question. To determine how the firm should adjust its mix of capital and labor, you need to consider their relative productivity and costs. Here's how you can approach this problem:
1. Calculate the marginal product of each input:
- Marginal Product of Capital (MPC) = 60
- Marginal Product of Labor (MPL) = 20
2. Calculate the marginal cost of each input:
- Marginal Cost of Capital (MCC) = price of capital ($6)
- Marginal Cost of Labor (MCL) = price of labor ($2.50)
3. Compare the ratios of marginal product to marginal cost for each input:
- MPC / MCC = 60 / $6 = 10
- MPL / MCL = 20 / $2.50 = 8
The firm should adjust its mix of capital and labor by employing more capital and reducing labor. This is because the marginal product of capital is higher compared to the marginal product of labor. By substituting labor with capital, the firm can increase its overall productivity.
The result of adjusting the mix of capital and labor depends on the specific circumstances and production function. Generally, if the firm effectively reallocates its resources by employing more capital, it may experience an increase in production efficiency and potentially reduce costs. However, other factors like diminishing returns to scale or fixed inputs may also affect the outcome.
It's worth mentioning that total product curve or variable and fixed costs may not be directly relevant to answering this question. Instead, focus on the marginal product and cost analysis to make informed decisions about resource allocation.
I hope this explanation helps! Let me know if you have any further questions.