Question

Max employs both labor and capital to produce his trinkets. currently the last unit of labor employed has a marginal product of 15 units. the last unit of capital employed has a marginal product of 40 units. the price of labor is $3 per unit and the price of capital is $10 per unit. if max is going to find the least-cost combination of labor and capital, he needs to ____ his employment of labor and ____ his employment of capital.

Answer 1

If spending $3 on one unit of labor gives you 15 units, then that gives you 5 units per $1 of investment in labor, or $0.20 per unit. Likewise, spending $10 per unit of capital gives you 40 units, then that gives you 4 units per $1 of investment in capital, or $0.25 per unit. Ignoring the time investment for each, the least-cost combination of labor and capital means he needs to maximize his employment of labor and minimize his employment of capital.