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Homework:
1. Optimal Combination of Resources
Sheet
Cost-Minimizing Input Combination
Students will explicitly assess information in relation to the Reffbru Galoshes
Company in order to draw conclusions about the firms profit maximizing
quantity of labor and the firms cost-minimizing capital blend
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Reffbru Galoshes Company
Analyze the information about the firm’s wekly production to determine the
profit maximizing quantity of labor to hire accounting for multiple market
events…
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Input Combination for Reffbru Co.
VS.
Labor-intensive production vs. capital-intensive production
Since Reffbru Co. can product profit maximizing Q with multiple combinations
of input, they will aim to minimize their costs of production (cost minimizing
input combination). We will use marginal analysis to determine right blend of
capital vs. labor.
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Cost Minimizing Rule:
MPL
Wage

MPC
Rental Rate
Maximize benefit per
$ for each factor of
production
2 possible blends of input (labor & capital):
Assume Reffbru Co. determines that the marginal product of
labor is 200 pairs of galoshes & marginal product of capital is
400 pairs of galoshes. Assume Reffbru Co. pays employees
$10/hr. and rents industrial sewing machines for $40/hr.
1.
Calculate the MPL and MPC per $1:
2.
Is the firm getting the most output possible from their
budget? If not explain how it should reallocate funds.
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Cost Minimizing Rule:
Maximize benefit per
$ for each factor of
production
2 possible blends of input (labor & capital):
MPL
Wage

MPC
Rental Rate
Assume Reffbru Co. determines that the marginal product of
labor is 200 pairs of galoshes & marginal product of capital is
400 pairs of galoshes. Assume Reffbru Co. pays employees
$10/hr. and rents industrial sewing machines for $40/hr.
Labor:
1.
2.
200
Calculate the MPL and MPC per $1: $10 = 20 G/$
Capital:
400
=
$40
Is the firm getting the most output possible from their
budget? If not explain how it should reallocate funds.
NO! They can do better by reallocating funds to labor  where
the firm yields a greater Q output per $
10 G/$
+ Rental Rate Interchangeable with
Wage Rate in the Product/Labor
Markets
A perfectly competitive product market and a firm renting machines from the
perfectly competitive product market: we can use rental rate in lieu of wage rate
when we are renting capital (do not pay capital a wage)