Question 7
Theory of ProductionA firm achieves least cost in production by substituting factors until
- A.their factor prices are equal
- B.their marginal-physical products are each equal to their factor prices
- C.their marginal-physical-products are each zero
- D.the ratio of their marginal-physical-products equals the ratio of their prices.
Show the answer and explanation
Answer: D (the ratio of their marginal-physical-products equals the ratio of their prices.)
Explanation
Cost is lowest when the last naira spent on each factor brings the same extra output, i.e. MP of A ÷ MP of B = price of A ÷ price of B.