CA Foundation P4 · Chapter 3 · Question 7 of 15
A firm uses labour and capital. MPL = 20 units, wage = Rs. 4, MPK = 30 units, rental of capital = Rs. 10. To minimise the cost of producing its current output, the firm should:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Use more labour and less capital
Explanation
Least-cost combination requires MPL/w = MPK/r. MPL/w = 20/4 = 5 units per rupee; MPK/r = 30/10 = 3 units per rupee. A rupee spent on labour yields more output, so the firm should substitute labour for capital until the ratios are equal.
More Theory of Production and Cost MCQs
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