Suppose a firm finds that the marginal product of capital is 60 and the marginal product of labor is

20. If the price of capital is $6 and the price of labor is $2.50, how should the firm adjust its mix of

capital and labor? What will be the result?

Here is what information is given:

The firm’s marginal product of capital, or MPK (K) is 60

The firm’s marginal product of labor, or MPL (L) is 20

The price of K = r = $6

The price of L = w = $2.5

This means that the output manufactured per unit of $ spent on K = MPK / r = 60 / 6 = 10

And, the output manufactured per unit of $ spent on L = MPL / w = 20 / 2.5 = 8

When the isocost and isoquant lines intersect at the point of tangency, a firm can minimize its total costs.

The isocost line shows the total cost that it incurred due to the use of different combinations of L and K,

while the isoquant line shows the total output that it produced.

Therefore, the slope of isocost line (- w/r) = slope of isoquant (- MPL/MPK)

- w/r = - MPL/MPK

MPK/r = MPL/w

Thus, in our given situation:

MPK/r = 10 and MPL/w = 8

So, MPK/r > MPL/w

This means to minimize Total Cost, the firm will have to increase its expenditure on MPK as it increases

the Q by 10 units for every $ spent on it. The firm should decrease the expenditure on MPL as it will

increase the Q by 8 units for every $ spent on it.

This will continue until MPK/r = MPL/w.

The result: The firm is substituting MPK (which is cheaper) for MPL (which is expensive) to minimize its

Total Cost. After changing the result will be that the Quantity manufactured per unit of $ spent on MPK

and MPL is equal.

 Rittenberg, L. & Tregarthen, T. (2009). Principles of Economics. Flat World Knowledge.

https://open.lib.umn.edu/principleseconomics/front-matter/publisher-information/