Can someone please explain this formula and why the answer is b
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The formula MP1/P1 = MP2/P2 represents the condition for input optimization, where MP refers to marginal product and P refers to the price of the input.
Option B states that the cost of an input is minimized when MP1/P1 = MP2/P2. Let’s understand why this is the case.
When MP1/P1 = MP2/P2, it implies that the additional output produced per unit of cost is equal for both inputs. In other words, the marginal benefit per unit of cost is the same for input 1 and input 2.
If the cost of input 1 is relatively higher compared to the marginal benefit it provides, the firm would be better off using more of input 2 and less of input 1. This is because input 2 provides the same marginal benefit at a lower cost.
Conversely, if the cost of input 2 is relatively higher compared to the marginal benefit it provides, the firm would be better off using more of input 1 and less of input 2. This is because input 1 provides the same marginal benefit at a lower cost.
Therefore, when MP1/P1 = MP2/P2, the firm achieves input optimization, where it minimizes the cost of input usage while maximizing the output.
Hence, the answer is option B: The cost of an input is minimized when MP1/P1 = MP2/P2.
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