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Sat 27 Apr, 2013 04:24 pm
ok, real newbie here, three weeks into college an
struggling t o get my head round some of the
concepts, can someone let me know if i am along
the right lines - the question posed is
a company 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?
so far i have worked out that
capital is spend 6 get 60 in return = 10
labor is spend 2.50 and get 20 back = 8
MPL/PL = 20/2.5= 8
MPK/PK = 60/6 = 10
now i know i should move capital to labor, but not sure how to equate for it.
i want to be able to prove that by moving the capital the equation is equal on both sides, which i think means that the firm has reached the max
output.
thanks for looking in
@Nonny,
The reply is late as I joined the forum today itself and was interested by the question.
Are u sure u need to move capital to labour? As the per unit marginal product of capital is higher than labour I think it is labour which has to be moved to capital. This will give a greater productivity for the same amount of money spent by the firm.
For max output MP(K)/MP(L) = P(K)/P(L).
L.H.S = 3
R.H.S = 2.4
If labour is moved to capital then MP(L) will increase (by diminishing marginal utility concept) and MP(K) will decrease. This will ultimately bring down the L.H.S to R.H.S. The output will increase as the firm will be on a higher isoquant than before.
Hope I am not wrong.
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