|Posted on April 18, 2014 at 10:15 AM|
When a firm employs two types of resources, we can determine the profit-maximizing quantity of each input by using the following equation:
Marginal Revenue Product of Labor / Price of Labor = Marginal Revenue Product of Capital / Price of Capital = 1
The ratios must be equal to one. If you need the MRP / P to decrease, then hire more units of that resource. This is because of the law of diminishing marginal returns (as inputs hired increases, marginal product and marginal revenue product decreases).
If you need the MRP / P to increase, then hire fewer units of that resource.
AP Microeconomics Unit 3 Resource Markets