If the firm is operating at a point on the given budget curve where the ratio of the marginal product of capital to the rental rate of capital is larger than the ratio of the marginal product of labor to the wage rate, i.e., when (MPK/r)>(MPL/w),

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    the firm will not switch the input combination because the manager understands that the marginal product of capital will fall as the firm uses more capital.
     the firm will switch the input combination to use more capital and less labor, as extra dollars spent on capital will yield greater increases in output than will be lost as the use of labor is reduced, thus increasing total output.
     the firm will switch the input combination to use more labor and less capital, since labor is less expensive.
     The firm will purchase more capital and the same amount of labor in order to increase output.
asked Jun 2, 2013 in Economics by anonymous
    

1 Answer

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the firm will switch the input combination to use more capital and less labor, as extra dollars spent on capital will yield greater increases in output than will be lost as the use of labor is reduced, thus increasing total output.
answered Jun 3, 2013 by Xyz ~Expert~ (3,650 points)

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