CMA Foundation · Fundamentals of Business Economics and Management · Theory of Production
A producer is using labour and capital so that MP of labour is 30 units at a wage of Rs 10, and MP of capital is 40 units at a price of Rs 20 per unit of capital. To reduce cost for the same output, the firm should:
The firm should use more labour and less capital. Labour yields 3 units of output per rupee (30/10), while capital yields only 2 (40/20). Since the ratios are unequal, the firm is not at equilibrium, and shifting spending toward labour lowers cost for the same output.
- AUse more labour and less capitalCorrect
- BUse more capital and less labour
- CLeave the input mix unchanged because it is at equilibrium
- DReduce both inputs in the same proportion
Explanation
MPL/w = 30/10 = 3 units per rupee, while MPK/r = 40/20 = 2 units per rupee. Labour gives more output per rupee, so substituting labour for capital lowers cost for the same output. Equilibrium would need the two ratios to be equal, which they are not.
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