Problem:
A firm employs two variable inputs, labour (L) and capital (K), in producing its output. At its present level of output:
Price (or cost) of L = $10 per unit
Price (or cost) of K = $2 for each unit
Marginal product of the L = 25
Marginal product of the K = 4
Required:
1. Find out whether the firm is operating efficiently, given that its objective is to reduce the cost of producing the current level of output. Describe your work, what you’re doing, and why.
2. Find out what changes, if any, in the relative proportions of labour and capital required to be made to operate efficiently. Describe your answer well.