Suppose that a firm uses only two inputs in its production process. The ratio of the marginal products of these inputs always exceeds the ratio of the prices of the inputs. What can you say about the cost-minimizing point of the firm?
A)It is an interior solution.
B)A cost-minimizing point must not exist.
C)If a cost-minimizing point exists, it must be at a corner.
D)Costs must be negative at the cost-minimizing point.

Question

Quizplus · Accepted Answer

The condition given in the question is known as the condition for the optimal input combination in production, which states that the cost-minimizing point occurs where the ratio of marginal products of inputs is equal to the ratio of their prices. Since the ratio of marginal products is always greater than the ratio of prices, the cost-minimizing point must occur at the corner where the firm uses more of the input that has a lower price. Thus, the answer is (C) - if a cost-minimizing point exists, it must be at a corner.

Suppose That a Firm Uses Only Two Inputs in Its