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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
Correct answer is option 'D'. Can you explain this answer?
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Verified Answer
If the marginal product of labor is 2, the marginal product of capital...
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.
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.
Most Upvoted Answer
If the marginal product of labor is 2, the marginal product of capital...
**Explanation:**
To determine the optimal combination of labor and capital, we need to compare the marginal product of labor (MPL) and the marginal product of capital (MPK) to their respective factor prices (wage rate and rental price of capital) in relation to the price of output.
Given:
- MPL = 2
- MPK = 4
- Wage rate (w) = INR 3
- Rental price of capital (r) = INR 6
- Price of output (P) = INR 1.50
The firm should consider the following factors:
**1. Marginal Productivity:**
The marginal productivity of labor (MPL) and capital (MPK) measures the additional output produced by adding one more unit of labor or capital, respectively. In this case, MPL = 2 and MPK = 4.
**2. Factor Prices:**
The wage rate (w) represents the cost of hiring one unit of labor, and the rental price of capital (r) represents the cost of renting one unit of capital. In this case, w = INR 3 and r = INR 6.
**3. Price of Output:**
The price of output (P) represents the revenue generated by selling one unit of output. In this case, P = INR 1.50.
**Optimal Combination of Labor and Capital:**
To determine the optimal combination of labor and capital, the firm should consider the marginal productivity of the factors in relation to their prices and the price of output.
Given that the MPL (2) is less than the wage rate (3), and the MPK (4) is less than the rental price of capital (6), it implies that the additional output generated by hiring one more unit of labor or capital is less than the cost of hiring them.
Therefore, it is not economically efficient for the firm to increase output by hiring more labor, more capital, or both. Similarly, it is not optimal to hold output constant and hire more labor while reducing the quantity of capital.
Hence, the correct answer is option 'D' - None of the above, as none of the options represents the optimal decision for the firm based on the given information.
To determine the optimal combination of labor and capital, we need to compare the marginal product of labor (MPL) and the marginal product of capital (MPK) to their respective factor prices (wage rate and rental price of capital) in relation to the price of output.
Given:
- MPL = 2
- MPK = 4
- Wage rate (w) = INR 3
- Rental price of capital (r) = INR 6
- Price of output (P) = INR 1.50
The firm should consider the following factors:
**1. Marginal Productivity:**
The marginal productivity of labor (MPL) and capital (MPK) measures the additional output produced by adding one more unit of labor or capital, respectively. In this case, MPL = 2 and MPK = 4.
**2. Factor Prices:**
The wage rate (w) represents the cost of hiring one unit of labor, and the rental price of capital (r) represents the cost of renting one unit of capital. In this case, w = INR 3 and r = INR 6.
**3. Price of Output:**
The price of output (P) represents the revenue generated by selling one unit of output. In this case, P = INR 1.50.
**Optimal Combination of Labor and Capital:**
To determine the optimal combination of labor and capital, the firm should consider the marginal productivity of the factors in relation to their prices and the price of output.
Given that the MPL (2) is less than the wage rate (3), and the MPK (4) is less than the rental price of capital (6), it implies that the additional output generated by hiring one more unit of labor or capital is less than the cost of hiring them.
Therefore, it is not economically efficient for the firm to increase output by hiring more labor, more capital, or both. Similarly, it is not optimal to hold output constant and hire more labor while reducing the quantity of capital.
Hence, the correct answer is option 'D' - None of the above, as none of the options represents the optimal decision for the firm based on the given information.
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D
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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 shoulda)Increase output by hiring more labor, more capital, or bothb)Hold output constant, but hire more labor and less capitalc)Decrease output by reducing the quantity of capital, reducing the number of units of labor, or bothd)None of the aboveCorrect answer is option 'D'. Can you explain this answer?
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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 shoulda)Increase output by hiring more labor, more capital, or bothb)Hold output constant, but hire more labor and less capitalc)Decrease output by reducing the quantity of capital, reducing the number of units of labor, or bothd)None of the aboveCorrect answer is option 'D'. Can you explain this answer? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about 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 shoulda)Increase output by hiring more labor, more capital, or bothb)Hold output constant, but hire more labor and less capitalc)Decrease output by reducing the quantity of capital, reducing the number of units of labor, or bothd)None of the aboveCorrect answer is option 'D'. Can you explain this answer? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for 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 shoulda)Increase output by hiring more labor, more capital, or bothb)Hold output constant, but hire more labor and less capitalc)Decrease output by reducing the quantity of capital, reducing the number of units of labor, or bothd)None of the aboveCorrect answer is option 'D'. Can you explain this answer?.
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 shoulda)Increase output by hiring more labor, more capital, or bothb)Hold output constant, but hire more labor and less capitalc)Decrease output by reducing the quantity of capital, reducing the number of units of labor, or bothd)None of the aboveCorrect answer is option 'D'. Can you explain this answer? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about 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 shoulda)Increase output by hiring more labor, more capital, or bothb)Hold output constant, but hire more labor and less capitalc)Decrease output by reducing the quantity of capital, reducing the number of units of labor, or bothd)None of the aboveCorrect answer is option 'D'. Can you explain this answer? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for 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 shoulda)Increase output by hiring more labor, more capital, or bothb)Hold output constant, but hire more labor and less capitalc)Decrease output by reducing the quantity of capital, reducing the number of units of labor, or bothd)None of the aboveCorrect answer is option 'D'. Can you explain this answer?.
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