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Least Cost and Profit Maximization Rules

1. Assume a firm is allocating all of its budget between labor and capital. The marginal physical product of labor (MPPl) is 200 and the marginal physical product of capital (MPPc) is 400. The price of labor is $10 and the price of capital is $40.

a. Calculate (show your work) the “MPP per $1 for each resource.

b. Based on your answers from part a, is the firm getting the most output possible from its resource budget? If not, explain how it should reallocate its budget between labor and capital.

c. Suppose the MPP of each are still the same but the price of labor is now $10 and the price of capital is now $20. Is the firm getting the most output possible from its resource budget? Explain.

2. Assume a different firm has allocated its budget so that the MPPl is 25 and the MPPc is 20. If the price of labor is $100, what is the price of capital? Show your work.

3. If a company produces 1,000 units of output with the combination of labor and capital such that the MRP of labor (MRPl) is $30 and the MRP of capital (MRPc) is $40. If this firm is maximizing its total profit at this output, what are the unit prices of labor and capital? Show your work?

4. Given a firm producing 800 units of output. Its MRPl = $60, its MRPc = $40. The market prices of labor and capital are $12 and $8, respectively. Is this firm maximizing its total profit? Explain.

5. Petmecky Inc. sells its goods in a perfectly competitive market and buys its resources in a perfectly competitive market. The MPPl = 50, MPPc = 80. The prices it pays per unit of labor and capital is $100 and $160 respectively.

a. Is the company operating in an economically efficient manner? Explain.

b. What would the market price of its good have to be for the firm to be maximizing its total profit? Explain.