Final answer:
A firm will make a cost-saving substitution toward the input with a higher marginal product per unit cost ratio (higher mp/p ratio), leading to more output per dollar and lower production costs in the long run. The correct answer is option b.
Step-by-step explanation:
For a given firm, whenever the ratio of marginal product to input price differs across inputs, it will always be possible to make a cost-saving substitution in favor of the input with the higher mp/p ratio. This is because the input with the higher marginal product per unit cost (mp/p ratio) is providing more output per dollar spent compared to the input with the lower mp/p ratio. In the long run, firms aim to produce at the lowest possible long-run average cost, which involves choosing a production technology that allows substitution of relatively inexpensive inputs for relatively expensive ones where possible.
To summarize, when faced with varying mp/p ratios among inputs, firms should opt for inputs that provide a higher output per dollar, indicating higher efficiency and cost-effectiveness in production. This substitution will lead to cost savings and could allow the firm to produce the same level of output with a lower total cost or increase their output without increasing costs.