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Optimal Combination of Resources
When operating in the Long-run a firm can change its capital and its labor. Every firm has to decide what combination of labor(L) and capital(K) they should employ.
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The Least-Cost Combination of Resources
A firm would like to produce the most output possible for a given resource budget A firm also wants to produce a given level of output at the lowest total coast To accomplish this it should allocate its resource budget between units of labor and units of capital to satisfy the following: (MPP=Marginal Physical Product) (MRC=Marginal Resource Cost)
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Least Cost Combination (Perfectly Competitive)
If the resource markets are perfectly competitive, the price the firm pays for an extra unit of a resource is equal to MRC. In this case: (P ) is the price of a unit of labor (P ) is the price of a unit of capital
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Profit Maximizing Combination of Resources
A firm cannot maximize its profits without using the least-cost combination of resources. An additional condition must be satisfied to guarantee that profits are maximized. It looks similar to the Least-Cost Combination of Resources 2 differences The firm is comparing MRP, not MPP, to MRC The two rations must both be equal to 1.
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Profit Maximizing Combination (Perfectly Competitive)
If the resource markets are perfectly competitive, the condition can be written as
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