Depends on the relative costs of capital the location

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Unformatted text preview: *, K*) Factor Demand and Output Supply If Then MPL = W/P and MPK = R/P W/MPL = P = R/MPK W = extra $ spent/extra unit of labor MPL = extra output / extra unit of labor W/MPL = extra $ / extra unit of output = marginal production cost (when using only L) R/MPK = extra $ /extra unit of output = marginal production cost (when using only K) Example Suppose K and L inputs are chosen so that MPL = 10 and MPK = 20 Given W = $100, R = $200 Then hiring the extra unit of L creates 10 units of output and costs $100 Hiring the extra unit of K creates 20 units of output and costs $200 At the margin, the extra units of output cost $10 each (W/MPL = $10) At the margin, the extra units of output cost $10 each (R/MPK = $10) Regardless of HOW the extra units are produced, MC = $10 Is output the efficient level? Depends on P If P > $10, increase output If P < $10, reduce output If P = $10, profits are maximized (i.e. P = MC) Marginal Cost Characterized in two ways: Marginal Opportunity Cost Value of other goods forgone when using resources to produce the marginal unit Dollar cost of purchasing resources required to complete the production Marginal Production Cost These concepts are equivalent when factor markets are competitive Prices of purchased resources are equal to the value of the alternative goods they could have been used to produce...
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