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

2. Factor Market Optimization
All market structures hire a single factor of production where MRP = MFC
MRP = MP input X MR output
MFC = marginal factor cost (wage rate or price of machine)
When hiring 2 substitute factors of production they must use the Least Cost Hiring Rule to achieve the correct combination

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

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

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

6. Least Cost Hiring Worksheet
Optimizing Factors of Production