Cost minimization requires:
A)that firms produce above the production function.
B)that the marginal product is equal to unity.
C)that the marginal cost be equal across all inputs.
D)that firms set the MRTS equal to the relative wage.

Question

Quizplus · Accepted Answer

Cost minimization requires that firms allocate their inputs in a way that the ratio of the marginal products to their respective input prices (i.e., the Marginal Rate of Technical Substitution or MRTS) is equal to the relative wage rate. This ensures that the firm is using its inputs efficiently and achieving the lowest cost of production possible given the level of output desired. Therefore, the best choice is D - that firms set the MRTS equal to the relative wage.

Cost Minimization Requires