The following is based on question 11 in the textbook: Suppose a firm has to choose among production methods for producing 1000kg of flour per day. The table shows the marginal product of capital and labour for each method. Suppose the price per unit of capital is $4 and the price per unit of labour is $6. Which method minimizes costs? A. A Method A B. B C. U C D E. E F. F G. G ABCDEFG с MPK 14 2086 + 12 10 4 2 MPL 3 6 9 12 15 18 21
The following is based on question 11 in the textbook: Suppose a firm has to choose among production methods for producing 1000kg of flour per day. The table shows the marginal product of capital and labour for each method. Suppose the price per unit of capital is $4 and the price per unit of labour is $6. Which method minimizes costs? A. A Method A B. B C. U C D E. E F. F G. G ABCDEFG с MPK 14 2086 + 12 10 4 2 MPL 3 6 9 12 15 18 21
Chapter1: Making Economics Decisions
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Transcribed Image Text:The following is based on question 11 in the textbook: Suppose a firm has to choose among production methods for producing 1000kg of flour per
day. The table shows the marginal product of capital and labour for each method. Suppose the price per unit of capital is $4 and the price per unit of
labour is $6. Which method minimizes costs?
Method
A.
A
B.
B
C.
с
D.
D
E.
E
F.
F
G.
G
ABCDEFG
MPK
14
12
10
8
642
MPL
3
6
9
12
15
18
21
Expert Solution
Step 1
Cost minimization can be defined as the process of reducing expenditure on those processes which are not required or are inefficient.
The formula for cost minimization is based on the rule that cost is minimized at that level where Marginal Product of Labor (MPL) divided by Wage (w) is equal to Marginal Product of Capital (MPK) divided by price of capital (r)
i.e. MPL / w = MPK / r
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