Your manager comes in with three sets of proposals for a new production process. Each process uses three inputs: land, labor, and capital. Under proposal A, the firm would be producing an output where the MPP of land is 30, labor is 42, and capital is 36. Under proposal B, at the output produced the MPP would be 20 for land, 35 for labor, and 96 for capital. Under proposal C, the MPP would be 40 for land, 56 for labor, and 36 for capital. Inputs' cost per hour is $5 for land, $7 for labor, and $6 for capital.
a. Which proposal would you adopt?
b. If the price of labor rises to $14, how will your answer change?
The marginal physical product (MPP) tells us how productive the input will be. We want to maximize MPP, but also keep costs reasonable. In other words, the firm wants to find the most economically efficient input mix. This is found where the marginal rate of technical substitution between the inputs equals the factor price ratio. The marginal rate of technical substitution is equal to the ratio of the marginal ...
Evaluation proposals for a new production process using land, labor and capital