If the MRP per dollar is greater for labor than that for tools, a producer should spend more money on labor than originally planned and less on tools. How long can he continue this switch in spending? Why?
What will be an ideal response?
By the “law” of diminishing returns, when the producer buys more and more labor time, the initially higher MRP of labor will decline. As he or she spends less and less on tools, tools will become scarcer and more valuable and their initially lower MRP will rise. So, as the producer transfers more money from tools to labor, the MRPs per dollar for the inputs will get closer and closer to one another, and they will eventually meet. That, then, is when the proportions of spending allocated to the two inputs will have reached the optimal level. At that point, there is no way he or she can get more for his or her money by changing the proportions of those inputs that he or she hires or buys.
You might also like to view...
The addition of new resources often enables a nation to
a. produce more goods and services b. produce less goods and services c. produce more goods but fewer services d. invade other nations and steal their resources
Jeanie Reuter and Janet Rothman are tenants in first and second floor apartments. Jeanie practices her piano lessons in the morning, while Janet practices aerobics on drum beats at the same time. Further assume that the value of practice to Jeanie is $10 while the value of aerobic exercises to Janet is $6 . If Jeanie has the right to practice piano peacefully, which of the following will be a
feasible solution to the problem? a. Janet will choose a different time for practicing aerobics. b. Janet will pay Jeanie $6 to make her change the time for piano practice. c. Janet will pay Jeanie $10 to make her change the time for piano practice. d. Jeanie will pay Janet $4 to make her change the time for aerobics exercises.