To achieve profit maximization, a firm should adjust its resource allocation until the _______ of labor divided by the wage is equal to the _______ of capital divided by the price of capital.

To achieve profit maximization, a firm should keep adjusting its use of labor and capital until the ratio of the marginal product of labor to the wage equals the ratio of the marginal product of capital to the price of capital. This equality means that the extra profit earned from adding one more worker is the same as the extra profit earned from adding one more unit of capital, so no further gains can be made by reallocating resources. For example, if a worker’s marginal product is 10 units of output and the wage is $5, then MPL/w = 10/5 = 2. If a machine’s marginal product is 20 units and its price is $10, then MPK/pK = 20/10 = 2, satisfying the condition. When both ratios are equal, the firm has reached the point where any further change would reduce profit rather than increase it.