Question

4. True or False: Profit-maximizing firms will hire a resource only if they can make money by doing so.

A) True

B) False

5) True or False: In a market economy, each resource will tend to be paid according to its marginal revenue product. Highly productive resources will command low prices, whereas less productive resources will command higher prices.

A) True

B) False

6) A dressmaker uses labor and capital (sewing machines) to produce dresses in a competitive market. Suppose the last unit of labor hired cost $500 per month and increased output by 250 dresses. The last unit of capital hired (rented) cost $1,000 per month and increased output by 200 dresses.

The marginal product per dollar spent on the last unit of labor is , and the marginal product per dollar spent on the last unit of capital is .

The dressmaker currently minimizing unit costs.

In order to minimize unit costs, what strategy should the dressmaker undertake?

A) The dressmaker is already minimizing unit costs, so no changes are needed.

B) The dressmaker should increase units of capital and decrease units of labor utilized in production.

C) The dressmaker should increase units of labor and decrease units of capital utilized in production.

Answer 1

4. True

Profit maximising firm is the firm whose aim is to earn profit by using resources. If resource gives positive profit then firm will use it.

5. False

Higher productive resource have higher price while lower productive have lower price.

6. Marginal product per dollar = Marginal product of labor/Price of labor = 250/500 = 0.5

Marginal product per dollar for capital = MP of capital/Price of capital = 200/1000 = 0.2

C) The dressmaker should increase units of labor and decrease units of capital utilized in production.

Since cost of labor is less and productivity is more so firm should increase units of labor and decrease units of capital.