Multiple Factors

Combining Resources

Up to this point we have analyzed the use of only one resource.

What about when a firm wants to combine different resources?

If you only have $35, what combination of robots and workers will maximize output?

Least Cost Rule

# Times Going

MP(Robots)

MP/PR

(PriceR =$10)

MP (Workers)

MP/PW

(PriceW =$5)

1st 30 3 20 4

2nd 20 2 15 3

3rd 10 1 10 2

4th 5 .50 5 1

$10 $5How much additional output does each

resource generate per dollar spent?

If you only have $35, the best combination is 2 robots and 3 workers

Least Cost Rule

# Times Going

MP(Robots)

MP/PR

(PriceR =$10)

MP (Workers)

MP/PW

(PriceW =$5)

1st 30 3 20 4

2nd 20 2 15 3

3rd 10 1 10 2

4th 5 .50 5 1

$10MPk = MPL

Pk PL$5

Resource k Resource L

Profit Maximizing Rule for a Combing Resources

MRPk = MRPL =MRCk MRCL

1This means that the firm is hiring where MRP = MRC for each resource k and L

Practice: What should the firm do – hire more, hire less, or stay put?

1. MRPL = $15; PL = $6; MRPC = $10; PC = $10

2. MRPL = $5; PL = $10; MRPC = $10; PC = $15

3. MRPL = $25; PL = $20; MRPC = $15; PC = $15

4. MRPL = $12; PL = $12; MRPC = $50; PC = $40

5. MRPL = $20; PL = $15; MRPC = $100; PC =$40

MORE

LESS

STAY PUT

MORE

MORE MORE

MORE

STAY PUT

STAY PUT

LESS