The equilibrium condition for producers (i.e., the condition that exists when the isocost Line is tangent to an isoquant) is __________. A) (MPP_L/r) = (MPP_K/w) B) (MPP_L/MPP_K) = (w/r) C) (MU_B/MU_A) = (P_B/P_A) D) (MU_B/P_A) = (MU_A/P_B)

Question

Quizplus · Accepted Answer

The equilibrium condition for producers is the condition where the isocost line is tangent to an isoquant. This condition is achieved when the ratio of the marginal products of the two inputs used in production is equal to the ratio of their prices. Therefore, option B is the correct formula for the equilibrium condition, where MPP is the marginal physical product, U is the isoquant curve, L and K are the inputs, w is the wage rate, and r is the rental rate of capital. Option A is incorrect because it does not involve the price ratio of the two inputs, option C involves the price and marginal utility of the output rather than the inputs, and option D involves the marginal utility of the inputs rather than the price ratio.

The Equilibrium Condition for Producers (I