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Question 4 (4 marks) Consider a firm which has a variety of methods (involving differing amounts of capital and labour) of producing its current level of output
Question 4 (4 marks) Consider a firm which has a variety of methods (involving differing amounts of capital and labour) of producing its current level of output. The following table shows the marginal products of capital (K) and labour (L) for each of the possible methods.
Show work
Production Method MPx MPL A 50 4 B 45 8 C 40 12 D 35 16 E 30 20 F 25 24 G 20 28
Suppose capital costs $7.50 per unit and labour costs $5.00 per unit. Calculate, if possible, which method minimize costs?
Expert Solution
Determination of Method which minimizes cost:
Cost is minimized when MPL / MPK = Cost of Labor / Cost of Capital
= $5.00/$7.50
= 5/7.50
This holds true when MPL = 20 and MPK = 30
So,
MPL / MPK = 20/30 = 5/7.50,
and corresponding method is E.
So, Method which minimizes cost is E.
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