Suppose a firm hires both labor (L) and capital (C) under purely competitive conditions.The price of labor is PL, and that of capital is PC.The marginal product of labor is MPL, and that of capital is MPC.The firm sells its product competitively at a price of PX.Which of the following must pertain if the firm is to minimize the cost of producing any output?
A)MPC = MPL = PX
B)MPC = PC and MPL = PL
C)MPC / PC = MPL / PL
D)MPC / PX = MPL / PX

Question

Quizplus · Accepted Answer

To minimize costs, the firm should equate the ratio of the marginal product to the price for each input, i.e., MPC / PC = MPL / PL. This ensures that the firm is getting the same marginal product per dollar spent on each input.

Suppose a Firm Hires Both Labor (L) and Capital (C)