To minimize the cost of producing a given quantity of output, the input bundle must be chosen so that the marginal products of all inputs are identical. True or false?
False.
To minimize the cost of producing a given quantity of output, the input bundle must be chosen so that the ratio of marginal products to input prices are equal across all inputs. This concept is known as the principle of equalizing marginal cost.
To understand this, we need to consider the concept of marginal product. The marginal product refers to the additional output that is obtained by increasing the quantity of a particular input while keeping all other inputs constant. In other words, it measures the rate of change in output resulting from a change in the input level.
If all inputs have identical marginal products, it means that increasing any one input will result in the same additional output, regardless of which input is increased. This scenario is highly unlikely in practical situations.
The principle of equalizing marginal cost, on the other hand, suggests that to minimize the cost of production, firms should allocate their inputs in such a way that the ratio of the marginal product to the price of each input is the same. This ensures that for each additional unit of input, the firm is getting the same amount of additional output per unit of cost.
So, to minimize the cost of production, it is important to consider not only the marginal products of inputs but also their respective prices and ensure that the marginal product-to-price ratios are equal across all inputs.