Answer to Question #307808 in Microeconomics for lydia

Question

When a firm uses different factors of production or at least cost combination the optimum combination of factors is achieved when MPL / PL = MPL / PL. Intuitively explain this statement

Answer 1

If the marginal benefit of additional labor, $\frac{MP_{L} }{P_{L}}$, is greater than marginal cost, $\frac{MP_{K} }{P_{K}}$, then the organization will be better off by spending more on labor and less on capital. Also, if $\frac{MP_{K} }{P_{K}}$ is exceeds $\frac{MP_{L} }{P_{L}}$ , the firm should be spending more on capital and less on labor. When a business generates the maximum quantity of output for a given cost, it is said to be in equilibrium given by: $\frac{MP_{L} }{P_{L}} = \frac{MP_{K} }{P_{K}}$.