Question

A producer is hiring 20 units of labor and 6 units of capital (bundle A). The price of labor is $10, the price of capital is $2, and at A, the marginal products of labor and capital are both equal to 20. In equilibrium, ( include explanation please )

a.         MP_L will be less than 20.

b.         MP_K will be more than 20.

c.         MP_L will be 5 times MP_K.

d.         a and b

e.         none of the above

Answer 1

Answer : The answer is option c.

Based on given information, labor price = $10 and capital price = $2. This means that the price of labor is 5 times of capital price. The marginal product of labor (MP_L) and marginal product of capital (MP_K) both are equal to 20. Labor price = 5 times of capital price means that at equilibrium the number of labor is 5 times of capital. As MP_L = MP_K = 20 and labor is 5 times of capital hence "MP_L will be 5 times of MP_K". Therefore, option c is correct.