The price of labor is $2, and the price of capital is $1. The marginal product of labor is 200, and the marginal product of capital is 50. What should the firm do?

The price of labor is $2, and the price of capital is $1. The marginal product of labor is 200, and the marginal product of capital is 50. What should the firm do? Correct Answer Decrease capital and increase labor so that the marginal product of capital rises and the marginal product of labor falls.

C —Do a quick ratio of marginal product per dollar. When you see that the MPL/PL > MPK/PK , you notice that the firm is getting more "bang for the buck" with labor. Immediately rule out any choice that says they hire less labor. The only way that MPL/PL falls to equal MPK/PK is to decrease the capital and increase the labor, causing the MPK to rise and the MPL to fall. The firm does this until the marginal products divided by the prices are equal.
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