Question

In a Leontieff production function, the marginal product of labor is always zero. The same is true for the marginal product of capital. Ture or False

Answer 1

Marginal product of capital (MPK) is the incremental increase in total production that results from one unit increase in capital while keeping all other inputs constant.

Identifying the marginal product of capital is important because firms take investment decisions by comparing their marginal product of capital with their cost of capital. When the marginal product of capital is higher than the cost of capital, it makes sense to increase production by increasing capital but as soon as marginal product of capital falls below the cost of capital, adding any more capital results in a decrease in the firm’s profit.