Explain how firms choose the amount of capital goods to purchase and the amount of labor to hire
What will be an ideal response?
To maximize profits, firms will purchase capital goods as long as the capital goods produce more output than the firm has to pay for the capital goods. As long as the real rental price of capital is less than the marginal product of capital, firms will continue to purchase capital goods. Firms will purchase capital goods up to the point where the marginal product of capital is equal to the real rental price of capital. Firms will hire as long as the labor produces more output than the firm has to pay for the labor. As long as the real wage is less than the marginal product of labor, firms will continue to hire labor. Firms will hire labor up to the point where the marginal product of labor is equal to the real wage.
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Refer to Figure 26-5. In the figure above, the movement from point A to point B in the money market would be caused by
A) an open market sale of Treasury securities by the Federal Reserve. B) an increase in the price level. C) a decrease in real GDP. D) an increase in the required reserve ratio by the Federal Reserve.
A monopsony hires labor up to the point where the marginal revenue product of labor equals the wage rate
a. True b. False Indicate whether the statement is true or false