Least Cost Rule and
Profit Maximizing Rule
Getting the Most Bang for Your
Buck as a Producer
Packet o’graphs page 32
Least Cost Rule
Remember the prime directive of the seller:
firms want to use the combination of resources
in production to maximize profits
Least Cost Rule: Sellers maximize utility just
like consumers when they purchase things
MP LABOR
$ LABOR
=
MP CAPITAL
$ CAPITAL
Long run cost curves assume that each level of
output is being produced with the least cost
combinations of inputs
Profit Maximizing Rule
Profit maximizing rule states that in a
competitive market, the price of the
resource must equal marginal revenue
product (MRP)
MRP LABOR = MRP CAPITAL
$ LABOR
$ CAPITAL
=1
MRP vs. MP
MRP = ∆ Total Revenue
∆ inputs
or MRP = Marginal Product (or
Marginal Physical Product ) x Price of
product - perfect competition only!
MP = ∆ total product
∆ inputs
In Any Event, Know the
Two Formulas
With your working group, write out
your own answers
Capital
0
1
2
3
4
5
6
7
8
MP Capital
24
21
18
15
9
6
3
1
Labor
0
1
2
3
4
5
6
7
8
MP Labor
11
9
8
7
6
4
1
1/2
Use the information from the chart. In a
perfectly competitive market, capital costs $3
per unit and labor costs $1 per unit. Product
price is $1.
a) What is the least cost combination of labor
and capital the firm should use for producing
80 units of output?
b) What is the profit-maximizing combination of
labor and capital? What is the level of
output? What is the economic profit? Is this
the least costly way to produce the profit
maximizing output? (product price is $1)