Question

What variable will firms use to judge where to place their money

Answer 1

Firms spend their money to buy factors of production to produce goods and services in order to earn profits . So when deciding where to place money , firms first look at the production function . A production function in economics, relates quantities of physical output of a production process to quantities of physical inputs or factors of production .

Secondly their objective is to minimize costs or utilize their money in the most effective way . So firms calculate marginal product of inputs and equate the ratio of marginal products to ratio of dollars spent on inputs . Firms adjust their hiring of inputs or spending of money until the marginal product per dollar is equal for all inputs . So the variable used by firms is marginal product .