Consider a small landscaping company run by Mr. Viemeister. He is considering increasing his firm’s capacity. If he adds one more worker, the firm’s total monthly revenue will increase from $50,000 to $58,000. If he adds one more tractor, monthly revenue will increase from $50,000 to $62,000. Additional workers each cost $4000 per month, while an additional tractor would also cost $4000 per month.

a. What is the marginal product of labor? The marginal product of capital?

MPL = $¬

MPK = $¬

b. What is the ratio of the marginal product of labor to the price of labor (MPL / PL )?

MPL / PL = ¬

What is the ratio of the marginal product of capital to the price of capital (MPK/ PK )?

MPK / PK = ¬

c. Is the firm using the least-costly combination of inputs?
Choose:
1. Yes, because MPK/PK = MPL/PL.
-or-
2. No, because MPK/PK > MPL/PL.

d. Does adding an additional worker or adding an additional tractor yield a larger increase in total revenue for each dollar spent?
Choose:
1. Revenue is increased more by spending money on an additional worker.
-or-
2. Revenue is increased more by spending money on an additional tractor.