Sam’s company produces output with labor and capital. At the current q

Sam’s company produces output with labor and capital. At the current quantities of labor and capital, the following information is obtained: the output produced by spending one more dollar on labor exceeds the output produced by spending one more

dollar on capital. In the long run, is Sam minimizing costs? If not, explain how capital and labor should change (holding output constant) and how this relates to the condition.

ANSWER

The last dollar rule is not satisfied. He should spend more on labor and less on capital. At this point, MRTS > w/r.