Question

A compay operates plants in both the United States (where capital is relatively cheap and labor is reltively expensive) and Mexico (where labaor is relatively cheap and capital is relatively expensive) Under what circumstances will the inpupt choice be relatively similar?

Answer 1

Answer: The input choice will be relatively similar when prices and the marginal product of both capital and labor are equal.

Explanation:

For a cost minimizing output, it is required for a firm to employ resoruces where the MPl/Pl = MPk/Ok

Note that:

MPl = marginal product of labor

Pl = labor price

MPk = marginal product of capital

Pk = capital price

A firm that has cheap capital resources will employ more capital likewise the company that has cheap labor resources will employ more of labor.

The input choice will be relatively similar when prices and the marginal product of both capital and labor are equal.