Question

If a unit of land costs $1 and a unit of labor costs $5 in the production process, then the firm is at a least-cost position when:

a. The marginal physical product of land is five times that of labor.
b. The marginal physical product of labor is five times that of land.
c. The marginal physical products of labor and land are equal.
d. Impossible to tell unless the price of the final product is known.

Answer 1

The firm is at a least-cost position when the marginal physical product of land is five times that of labor, aligning input costs with their respective outputs.

Step-by-step explanation:

The question asks about the conditions for a firm to be in a least-cost position in terms of its inputs for production, specifically land and labor. Using the concept of marginal physical product (MPP), which is the additional output resulting from using an additional unit of a particular input, a firm will be in a least-cost position when the ratio of the marginal products is equal to the ratio of the input costs. In this scenario, a unit of land costs $1, and a unit of labor costs $5. Therefore, the firm is at a least-cost position when the marginal physical product of land is five times that of labor because the additional output gained from an additional unit of land should compensate adequately for the cheaper cost compared to labor, aligning with the cost ratios.