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Cost Minimizing Input Combinations

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 firms determine the optimal input mix. The cost-minimizing rule for hiring inputs.

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Cost Minimizing Input Combinations

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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 firms determine the optimal input mix. • The cost-minimizing rule for hiring inputs.

  3. Alternative Input Combinations • Substitutes • Complements

  4. Ditch Digging – 100 feet

  5. Backhoe 300 ft., Diggers 100 ft.

  6. Least Cost Rule • Least-cost combination of inputs • Cost-minimization rule MPL/w = MPK/r

  7. Profit Maximizing Rule • Firm produces at MR=MC=P • MPRL = MPL x MR • MRPL = MCL (wage) or • MRPL/w = 1 • Profit maximizing rule: MRPL/w = MRPK/r=1

  8. Summary • Factors of production can be complements or substitutes. • If substitutes, the key economic question is how much of each input to use in production. • Determine the marginal product per dollar for each input. MP of factor / cost per unit of factor • Cost minimizing input combination is where MPL/w = MPK/r

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