How do you choose the right combination of inputs? Least Cost Hiring How do you choose the right combination of inputs?

Factor Market Optimization All market structures hire a single factor of production where MRP = MFC MRP = MP input X MR output MFC = marginal factor cost (wage rate or price of machine) When hiring 2 substitute factors of production they must use the Least Cost Hiring Rule to achieve the correct combination

What Combination? Machines Physical Capital MPL MPK Workers Labor

The Least-Cost Rule MPL/PL = MPK/PK To hire the optimal combination of 2 resources equate the ratio of the MP to the price of inputs Capital (physical) or Labor Your choice must satisfy the following equation (Only one combination will work!) MPL/PL = MPK/PK If MPL/PL > MPK/PK then L & K If MPL/PL < MPK/PK then do opposite Example: MPL = 5 units per hour Wage = $10 hour 5/$10 = .50 units per dollar Ratio tells you that you get 0.5 units of output per $100 of cost

Ratio of MP/Price Input MP/Priceinput is the amount of output per $1 dollar cost Large ratio is cheap => hire more of that input Small ratio is expensive => hire less of that input Machines Physical Capital MPk/Pk = 20 Workers Labor MPL/PL = 10

Least Cost Hiring Worksheet Optimizing Factors of Production