Least Cost Hiring How do you choose the right combination of inputs? 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 What Combination? Machines Physical Capital MPK Workers Labor MPL The Least-Cost Rule • To hire the optimal combination of 2 resources equate the ratio of the MP to the price of inputs Labor or Capital (physical) Your choice must satisfy the following equation (Only one combination will work!) Example: MPL = 5 units per hour Wage = $10 hour MPL/PL = MPK/PK • If MPL/PL > MPK/PK then L & • If MPL/PL < MPK/PK then do opposite K 5/$10 = .50 units per dollar Ratio tells you that you get 0.5 units of output per $100 of cost 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 MPL/PL = 10 MPk/Pk = 20 Machines Physical Capital Workers Labor Least Cost Hiring Worksheet • Optimizing Factors of Production