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

Question

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

Quizplus · Accepted Answer

The condition given in the question, MP_X/P_X > MP_Y/P_Y, means that the marginal product per unit of the cost of input X is higher than the marginal product per unit of the cost of input Y. In other words, for a given cost, the firm can produce more output by using input X than input Y. To minimize the cost of production, the firm should use a combination of inputs that produces a given level of output at the lowest cost. This can be achieved by equating the marginal product per unit of cost for each input. In this case, since the marginal product per unit cost of input X is higher, the firm should use more input X and less input Y. Therefore, the answer is B: more input X and less input Y.

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