Question

what is meant by the term least cost combination? what is the implication of this combination of inputs to produce a given level of out

Answer 1

Least cost combination is given the production function assuming it satisfies diminishing factor returns, firms try to minimize the cost of production and compute factor prices which can produce the good at minimum costs associated with production.

If we are given a certain level of output Q₀ and factors of production are l for labour with wage rate w and k for capital with rental price r implies cost function will be wl+rk and production function f(l,k) satisfying diminishing returns;

using lagrange to minimize cost given production function as

will derive the level of labor and capital producing given level of output at least cost.