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KRUGMAN'S MICROECONOMICS for AP*

Module. Micro: Econ:. 36. 72. Cost Minimizing Input Combinations. KRUGMAN'S MICROECONOMICS for AP*. Margaret Ray and David Anderson. What you will learn in this Module :. How do firms determine the optimal input mix ? What is the cost-minimizing rule for hiring inputs?.

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KRUGMAN'S MICROECONOMICS for AP*

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  1. Module Micro: Econ: 36 72 Cost MinimizingInput Combinations KRUGMAN'S MICROECONOMICS for AP* Margaret Ray and David Anderson

  2. What you will learnin thisModule: • How do firms determine the optimal input mix? • What is the cost-minimizing rule for hiring inputs?

  3. Small group discussion What use is this?

  4. Alternative Input Combinations • Substitutes • Note: sometimes inputs can be substitutes for themselves – globalized labor • Complements

  5. Determining the Optimal Input Mix • So, if there are many ways of a bank exchanging money with their customers, how do they choose? • Least-cost combination of inputs • Cost-minimization rule MPL/w = MPK/r

  6. What use is this? • What if the marginal productivity of one factor of production has increased relative to another? • What if the price of one factor has gone significantly up or down? • If one side is unequal, they can move around the proportion of factors of production to stay at about the same level of production without increasing costs.

  7. What use is this? • A firm uses two inputs, capital and labor, to produce output. Its production function exhibits a diminishing marginal rate of technical substitution. • a) If the price of capital and labor services both increase by the same percentage amount (e.g., 20 percent), what will happen to the cost-minimizing input quantities for a given output level? • b) If the price of capital increases by 20 percent while the price of labor increases by 10 percent, what will happen to the cost-minimizing input quantities for a given output level?

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