Answer to Question #51402 in Economics of Enterprise for rick

Question

Assume that a firm hires only labour and capital to produce bicycles

Explain the cost minimization rule for this firm and why this rule is logical

Suppose that the firm hires 100 units of capital and 500 units of labour and that the MPl is 20 while MPk is 25. If a unit of labour costs $4.00 and a unit of capital costs $5.00, is the firm minimizing costs?
Explain

If the price of capital falls to $4.00 what should the firm do to minimize cost? Explain why your answer is consistent with the cost minimization rule.

Answer 1

The cost minimization rule for this firm will be in the case, when the firm has equal MPl and MPk. This rule is logical, because we can understand that without any learning.

Suppose that the firm hires 100 units of capital and 500 units of labour and that the MPl is 20 while MPk is 25. If a unit of labour costs $4.00 and a unit of capital costs $5.00, then MPl and MPk are not equal, so the firm doesn't minimize costs.

If the price of capital falls to $4.00, the firm will minimize cost, if it hires more units of capital and equalize MPl and MPk.