Suppose a firm employs two inputs,X and Y,and that at their current levels of use MPX/PX MPY/PY.To minimize the cost of production,the firm should hire
A)more input X only if its price decreases.
B)more input Y and less input X.
C)more input X and less input Y.
D)more input X only if its price increases.
E)more input Y only if its price falls.

Question

Suppose a firm employs two inputs,X and Y,and that at their current levels of use MPX/PX > MPY/PY.To minimize the cost of production,the firm should hire
A)more input X only if its price decreases.
B)more input Y and less input X.
C)more input X and less input Y.
D)more input X only if its price increases.
E)more input Y only if its price falls.

Quizplus · Accepted Answer

The condition MPX/PX > MPY/PY is the same as saying that the marginal productivity per dollar spent is higher for input X than input Y. Therefore, the firm should hire more of input X and less of input Y in order to minimize the cost of production while maintaining output levels. This is consistent with the idea of diminishing marginal returns, where it becomes more costly to add more of an input as you approach the optimal level.  So, option C is the correct choice.

Suppose a Firm Employs Two Inputs,X and Y,and That at Their