AP Microeconomics

7.2 Cost Minimization Assignment

Suppose a firm's marginal product of capital and marginal product of labor schedules are as shown in
the table below. The firm hires both capital and labor competitively for $5 and $8, respectively. This
assignment will be graded out of 6 points with 2 points possible for each question.

Capital MP of Labor MP of Labor

Capital

0 0

1 10 1 28

2 9 2 30

3 8 3 24

4 7 4 20

5 6 5 16

6 5 6 12

7 4 7 8

8 3 9 4

1. Suppose the firm is currently using 4 units of capital and 4 units of labor. Is the corresponding output
being produced at least cost? How do you know?
No, we know that the product is not being produced at least cost because the marginal products per
dollar are not equal to each other. E.g. the MP of capital / price of capital =/= the MP of labour /price of
labour

2. Consider your answer to the question above. Generally speaking, what would a firm need to do in
order to move towards producing at the least cost?
Overall b/c 7/5=1.4 and 20/8=2.5, they would first have to increase their labour b/c it is more productive
per dollar.

3. What is the least-cost combination of labor and capital?

1 capital + 5 labour