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What is the one important microeconomics principle from production theory? Explain the phenomenon.

What is the one important microeconomics principle from production theory? Explain the phenomenon.

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Answer #1

A general rule of optimization between factor inputs is the equimarginal principle. The ratio of Marginal productivity of a given factor with its price should be same for the factors. In this case, we must ensure that if labor and capital are employed

MPK/PK(rental price) = MPL/PL (wage rate)

In case MPK/PK(rental price) > MPL/PL (wage rate), capital is more productive and so it should use more capital and less labor. Similarly

In case MPK/PK(rental price) < MPL/PL (wage rate), labor is more productive and so it should use less capital and more labor.

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