Question

1. Suppose a paving company has two inputs, cement (C) and labor (L). The marginal product of cement at its current output level is 50. The current level of output is 1,000 parking spaces. The marginal product of labor at its current output level is 4. The current wage level is $12. The cost of cement is $4,000. Is the firm maximizing the cost at its current production?

A. Yes

B. No

C. Not certain

I made an error in the question; it should be minimizing the costs.

Answer 1

Answer 1

Cost minimizing Condition :

In order to minimize cost a firm hires that amount of input where Marginal product/Per unit cost is equal for all inputs i.e. Marginal Product of Labor/wage = Marginal Product of Capital/Cost of cement.

Here, Marginal Product of Labor/wage = 4/12 = 1/3 = 0.33

Marginal Product of Capital/Cost of cement = 50/4000 = 0.0125

Thus, Marginal Product of Labor/wage > Marginal Product of Capital/Cost of cement and hence the firm is not minimizing the cost.

Note : According to law of diminishing marginal product, as amount of input increases marginal product from every additional input will decrease. Thus here in order to minimize cost a firm should increase amount of labor and decrease amount of cement.  

Hence, the correct answer is (B) No