📚 Learning Guide
Resource Allocation for Profit Maximization
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If the ratio of the marginal revenue product of labor to its wage is analogous to the efficiency of using labor, what would be the equivalent analogy for capital allocation?

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Choose the Best Answer

A

Ratio of marginal revenue product of capital to its price

B

Ratio of total cost of capital to total revenue

C

Ratio of labor supply to labor demand

D

Ratio of total profit to total output

Understanding the Answer

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Answer

In economics, when we talk about the marginal revenue product of labor, we refer to the additional money a company earns from hiring one more worker. If we think of the efficiency of labor as the ratio of this revenue to the worker's wage, we can make a similar analogy for capital allocation by looking at the marginal revenue product of capital. This means we would compare the extra income generated by an additional unit of capital, like machinery or equipment, to the cost of using that capital. For example, if a factory buys a new machine that increases production and earns $10,000 more but costs $5,000 to use, the ratio of $10,000 to $5,000 shows how efficiently the capital is being used. By using this comparison, businesses can determine if spending on capital is worthwhile, just like they do with labor.

Detailed Explanation

The right way to measure how well we use capital is by looking at how much money it makes compared to its cost. Other options are incorrect because This option mixes total costs with total revenue; This option talks about how many workers we have versus how many we need.

Key Concepts

Resource Allocation for Profit Maximization
Marginal Revenue Product (MRP)
Cost Efficiency
Topic

Resource Allocation for Profit Maximization

Difficulty

medium level question

Cognitive Level

understand

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