Suppose a firm employs two inputs, X and Y, and that at their current levels of use MPX/PX
MPY/PY. To minimize the cost of production, the firm should hire
A) more input Y only if its price falls.
B) more input Y and less input X.
C) more input X only if its price decreases.
D) more input X only if its price increases.
E) more input X and less input Y.

Question

Suppose a firm employs two inputs, X and Y, and that at their current levels of use MPX/PX >
MPY/PY. To minimize the cost of production, the firm should hire
A) more input Y only if its price falls.
B) more input Y and less input X.
C) more input X only if its price decreases.
D) more input X only if its price increases.
E) more input X and less input Y.

Quizplus · Accepted Answer

As MPX/PX > MPY/PY, it implies that the marginal product per dollar spent on X is higher than that on Y. Therefore, to minimize the cost of production and maximize efficiency, the firm should hire more of input X, which provides higher marginal product per dollar spent, and less of input Y. Consequently, the answer is E, more input X and less input Y.

Suppose a Firm Employs Two Inputs, X and Y, and That