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Suppose a firm is currently minimizing costs in the long run with marginal product of labor and marginal product of capital given by K and L, respectively. If the price of capital falls by 50%, the capital-to-labor ratio will: A. increase by 50%. B. double. C. decrease by 50%. D. increase fivefold.

Respuesta :

Tundexi

Answer:

B. double.

Explanation:

At the Pareto optimal point, MPK/MPL = Price of K/Price of L

Substitute the given information as :

L/K = r/w  or K/L = w/r

When r decreases by 50%,

L'/K' = 0.5r/w  or K'/L '= 2w/r

From above,  K'/L' = 2(K/L)

Thus, capital to labor ratio (K/L) will double as double of capital will now be used since its price has fallen by half.

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