|Posted on April 18, 2014 at 10:00 AM|
When a firm employs two types of resources, we can determine the cost-minimizing quantity of each input by using the following equation:
Marginal Product of Labor / Price of Labor = Marginal Product of Capital / Price of Capital
The ratios must equal one another. If you need the MP / P to decrease, then hire more units of that resource. This is because of diminishing marginal returns (as inputs hired increases, marginal product decreases).
If you need the MP / P to increase, then hire fewer units of that resource.
AP Microeconomics Unit 3 Resource Markets