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Least Cost Hiring

Least Cost Hiring. How do you choose the right combination of inputs?. Optimizing 2-Factors of Production. Firms hire a single factor of production until MRP = MFC MRP = MP input X MR output MFC = marginal cost of factor

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Least Cost Hiring

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

  2. Optimizing 2-Factors of Production • Firms hire a singlefactor of production until MRP = MFC • MRP = MP input X MR outputMFC = marginal cost of factor • A firm can choose the best combination of 2 substitutefactors of productionthrough the Least Cost Hiring Rule

  3. What Combination? Machines Physical Capital Workers Labor MPL MPK

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

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

  6. Least Cost Hiring Worksheet • Optimizing Factors of Production

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