Question

The marginal product of labor is 100 boxes of software and wages are $10 per hour. A machine that does the same work rents for $200 per hour and packages 1000 boxes per hour. If the firm is currently producing the amount it wishes, what should it do?

A. Expand labor and reduce capital, the marginal product of capital is greater than the marginal product of labor

B. Expand labor and reduce capital, as capital costs significantly more

C. Expand capital and reduce labor, as the additional output for each dollar spent is greater for capital than labor

D. Expand labor and reduce capital, as the additional output for each dollar spent is greater for labor than for capital

Answer 1

Option D.

• The marginal product of labour is the increase or decrease in the output of a firm due to the increase or decrease in the labour when all other factor's in the production remains constant.
• Given that the marginal product of labour in a firm is 100 boxes of software at $10 per hour, While it can manufacture only 1000 boxes with $200 per hour.
• As the additional output for each dollar spent is greater for labour than for capital, the firm should expand labour and reduce capital.