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Is the firm minimizing costs? What steps can lower costs?

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A firm uses two variable inputs, labor, L, and raw materials, M, with typically shaped isoquants. It pays $20 per hour for L and $5 per unit for M. At the current mix of L and M, the marginal products of L and M are:

MPL = 20

MPM = 4

Is the firm minimizing costs? If not, what steps should it take to lower costs and still produce the same level of output?

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Solution Summary

This solution addresses the following economics question:

A firm uses two variable inputs, labor, L, and raw materials, M, with typically shaped isoquants. It pays $20 per hour for L and $5 per unit for M. At the current mix of L and M, the marginal products of L and M are:

MPL = 20

MPM = 4

Is the firm minimizing costs? If not, what steps should it take to lower costs and still produce the same level of output?

Solution Preview

Because we have:

20/5 = 4, the firm is not minimizing cost. If the firm decreases L from the current level of 20, it will minimize costs to ...

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