Question

Body Covers is a firm that employs 100 workers and 50 units of capital to produce beanie hats, gloves, face masks, and scarves. The current wage rate is $10 per hour, the rental rate of capital is $21 per hour, and the firm is producing a total of 200 beanie hats, gloves, face masks and scarves per hour. If the marginal product of capital is 5 and the marginal product of labor is 3, then Body Covers

		could increase its output at no extra cost by employing more capital and less labor.
		could reduce the cost of producing its current output level by employing more labor and less capital.
		is producing its current output level at the minimum cost.
		could reduce the cost of producing its current output level or increase its output at no extra cost by employing more capital and less labor.
		could reduce the cost of producing its current output level by employing more capital and less labor.

Answer 1

The Body Covers would reduce the cost of producing its current output level by employing more labor and less capital.This is because for cost minimizing level of output Marginal Rate of technical substitution is equal to input price ratio or slope of isoquant is equal to slope of isocost.

That is,

MRTS = W/R

MPL/MPK = W/R

3/5 > 10/21

In that case firm can reduce its cost by employing more labor and less capital because Benefit Cost ratio of labor is higher than that of capital.

Option B is correct.

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