Question

A fastfood restaurant currently pays $5 per hour for servers and $50 per hour for rental machinery. The restaurant uses seven hours of server time per unit of machinery time. Determine whether the restaurant is minimizing its cost of production when the ratio of marginal products (capital to labor) is 12. If not, what adjustments are called for

Answer 1

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Answer 2

Amount paid per hour for services = $5 (Given)

Amount paid per hour for rental machinery = $50 (Given)

In equilibrium, the formula will be r/w = MPk/MPl.

which means that if the firm is minimizing their costs of production, then the MRTS will equal a ratio of the prices of the inputs.

The ratio of prices, will be-

r/w = 50/5

= 10,

The MRTS of capital for labour will be - MPk/MPl = 12

Because these two ratios are not identical, the business will adjust the input mix. The company should use more resources and use less labor to make the ratios equal to increase efficiency in the use of inputs.