Answer to Question #153214 in Microeconomics for Chloee Sang

Question

 Explain How relative factor prices and factor productivity determine optimal input combination. Show clearly how the maximizing output and optimal inputs combinations are achieved in the two cases. 

Answer 1

Solution: 

Relative factor prices and factor productivity determine optimal input combinations by providing various combinations of factors that can yield a given output level. A producer has to choose one for production. These two factors help a producer accomplish an optimal input combination that will benefit them in output-produced and profit-maximizing price.

Factor productivity is achieved through an isoquant, which shows various technical possibilities of producing different output levels. Usually, an entrepreneur aims to maximize profits and, therefore, seek to minimize their cost for having a given output or maximize their output for a given level of outlay.

Factor prices are achieved through an isocost, which shows all the combinations of factors that cost the same to employ. The desire of an entrepreneur to produce a product is not enough. The entrepreneur must have sufficient capacity to buy the required factor inputs to reach its desired production level. The entrepreneur's capacity is shown by his cost outlay on capital and labor, the prices of which are taken as constant given in the market place.

Isocosts and isoquants can show the optimal combination of production factors to produce the maximum output at minimum cost. Therefore, a firm will desire to produce at the point of the highest possible isoquant and minimum possible isocost.