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How do you calculate the cost-minimizing combination of resources?

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

Categories: AP Microeconomics, Micro Unit 3 Resource Markets

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