Consider two firms, X and Y in the same industry who use the same production technology. To produce the same level of output, say 1000 pairs of bars, X uses more capital than Y and Y uses more labor than X. Suppose both companies pay the same wage to their employees: w = 15:

(Unless otherwise stated, assume that all firms choose their input levels optimally)

(a) Which company is paying a lower rent? Why? & Which company has a higher cost? Why?

(b) At their current optimal input bundles, the marginal product of labor is higher for which firm? Why?

(c) At their current optimal input bundles, the marginal product of labor is higher for which firm? Why?

(d) Circle the correct answer and provide a brief explanation.
If the wage rate doubles, firms' costs will MORE THAN / LESS THAN / EXACTLY double.

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