Suppose a firm is producing the profit-maximizing level of output and the MP of capital and labor are 10 and 20, respectively. If the wage is $10 and the rental rate for capital is $25, which of the following is true? To minimize costs the firm should
A. Use more capital.
B. Hire more labor and use less capital.
C. Hire less labor and use more capital.
D. Hire less labor.

B.Hire more labor and use less capital.

Explanation:

The firm producing at the profit-maximizing level of output means that Marginal Revenue = Marginal Cost, it can also be said that Marginal Productivity = Marginal wage/rent (Factor cost).

Therefore to minimize cost there should be a selection of factor mix that will be more efficient (i.e. comparing the cost of input to output) which will be to use more of the cheaper input and less of the costlier input

Since the cost of labor is $10 and that of capital is $25, compared to the marginal productivity of 10 and 20 respectively, it can be seen that labor is the more efficient resource or factor.

Therefore the cost minimizing choice of inputs will be more of labor and less of capital will minimize costs

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