Firm X wants to maximize profit. It will select a combination of labor and capital for which the marginal?

Question

product per dollar of labor is ?

more than the marginal product per dollar of capital.
equal to the wage.
equal to one.
equal to the cost of capital.
equal to the marginal product per dollar of capital.

Answer 1

The answer is equal to the marginal product per dollar of capital. Here is the underlying intuition. The marginal product means that for each additional unit of labor or capital used, the unit will give that dollar amount of output. If a firm can get $50 of output by adding an additional unit of labor but only $25 of output by adding an additional unit of capital, they will add an additional unit of labor. They will also likely shift some of their resources from capital to labor, as this is giving them more output. However, as they continue substituting towards labor, the concept of diminishing marginal returns tells us that the additional unit will provide less and less. So, say after they substitute x units of capital for labor that the marginal product of labor is now $40 and the marginal product of capital is $40. Here, there is no incentive to switch one form for the other, since both provide the same amount of output. Thus, this is where the producer will want to be.

Answer 2

Equal to the marginal product per dollar of capital