CFA Practice Question

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CFA Practice Question

Suppose a firm finds that an additional dollar spent on labor increases output more than an additional dollar spent on machines. Under these conditions, the firm ______
A. is either economically efficient or technically efficient.
B. should use more labor and fewer machines if it wants to increase economic efficiency.
C. should use more machines and less labor if it wants to increase economic efficiency.
Explanation: Since an additional dollar spent on labor adds more to output than an additional dollar spent on capital, a firm can reduce the cost of producing a certain amount of output by using more labor and fewer machines.

User Contributed Comments 1

User Comment
cheekywinky There is a fallacy in assuming that existing machinery is as inefficient as additional machinery. If the operation is at an optimum, then A is the correct answer, but we do not know anything about operating efficiency.
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