Question

A firm purchases capital and labor in competitive markets at prices of r = 6 and w = 4, respectively. WIth the firm's current input mix, MPK = 12 and MPL = 18.

If the firm reduced its capital by 1, it would produce 12 fewer units.

a) How much would the firm save in capital rental costs?

b) How many units of labor would the firm need to add to replace the lost output?

c) How much would the additional labor cost the firm?

d) How much would the firm save?

Thanks for your help, I appreciate it.

Answer 1

r=6 w=4 MPK=12 MPL=18

A. if 1 capital is reduced the firm would save the cost of 1 capital, that is equal to 6

B. since MPK is 12 it means the lost capital would have produced 12 units, so hiring 1 labor would do the needful as he would produce 18 units which would cover the lost 12 units and produce 6 more extra.

C. additional labor would cost the firm 4 dollars that is the wage rate

D.the firm is able to save 2 dollar. that is cost of capital - the cost of labor hired