Question

A firm chooses its input mix such that the marginal rate of technical substitution equals the ratio of input prices.

A. This is cost minimizing input mix

B. This is profit maximizing input mix

C. This is both profit maximizing as well as cost minimizing

D. This is neither cost minimizing nor profit maximizing input mix

This is a multiple choice question that has more than 1 right answer.

Answer 1

The equality between the Marginal Rate of Technical Substitution or MRTS and the input price ratio basically signifies that the ratio of the marginal product of the inputs and hence, alternatively this equality condition also states that the ration of the marginal product of the inputs is equal to the ratio of the respective input prices. This equality between the MRTS and the input price ration signifies that the slopes of the isocost line and the isoquant are equal for any firm and the corresponding input combination at this point represents the economically the most optimal input combination in the production process as it reflects the profit-maximizing or the cost-minimizing input combination for any respective firm. Therefore, the equality between the MRTS and ratio of input prices is an economic condition that can either reflect profit-maximization or cost-minimization. However, profit-maximization does not necessarily imply cost-minimization at the same time or simultanouelsy for any firm as profit-maximization implies economic efficiency for any firm but it does not always necessarily indicates cost-minimization at the same time. Hence, the answer, in this case, would options A. and B. given in the answer choices or options or This is cost minimizing input mix and This is profit maximizing input mix.