Assume a firm purchases resources a and b under purely competitive conditions and combines these resources to produce X. Product X is sold in a purely competitive market. The MPs of a and b are 6 and 3, respectively, and the prices of a and b are $12 and $6, respectively. If equilibrium exists, the price of X will be
A) $1.
B) $0.50.
C) $2.
D) $5.

Question

Quizplus · Accepted Answer

In equilibrium, the firm will hire resources such that the marginal product per dollar spent on each resource is equal. MPa/Pa = MPb/Pb. Here, 6/12 = 3/6 = 0.5. The price of X must be such that the value of the marginal product (VMP) equals the resource cost. VMPa = MPa * Px = 6 * Px = 12, so Px = $2.

Assume a Firm Purchases Resources a and B Under Purely