Shmear is a cream cheese manufacturing plant whose only inputs are capital (K) and labor (L). In this industry, wages are $18 per hour per worker and capital rent is $36 per hour per machine. At its current choice of inputs, the marginal product of labor is 36 boxes of cream cheese per additional worker hour and the marginal product of capital is 48 boxes of cream cheese per machine hour. The plant has options to make the production process more or less labor intensive. In this plant, labor and capital are imperfect substitutes for one another; that is one can be substituted for the other, but the substitution will impact the marginal productivity of each input.

a. Spending an additional dollar on labor will result in what level of additional output?
b.  Spending an additional dollar on capital will result in what level of additional output?
c.   Shmear is choosing the combination of inputs that minimizes the total costs of producing the current volume of cream cheese. If true, explain why. If false, should Shmear use a more capital-intensive process or more labor-intensive process of producing the current volume of cream cheese? Explain.

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a To calculate the additional output resulting from spending an additional dollar on labor you need to consider the marginal product of labor which is ... View the full answer