Suppose Labor and Capital Are Variable Inputs

question 121

Multiple Choice

Suppose labor and capital are variable inputs. The wage rate is $20 per hour, the marginal product of labor is 30 units, the rental rate of capital is $100 per machine hour, and the marginal product of capital is 150 units. If the wage rate declines to $15 per hour, the firm employs more labor and the marginal product of labor declines to 20 units. Assuming the rental rate of capital remains the same, what happens to the amount of capital used by the firm?

• A) Decreases
• B) Increases
• C) No change
• D) We do not have enough information to answer this question.

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