Question

Explain how a firm sets its optimum input (labor) level.  How is this optimum arrived at?

Please use Microeconomics concepts to explain it.

Answer 1

Optimum input level is determined by the following rule

Price of the product * marginal product of the input

= Price of the input

When there are two inputs used by the firm, the following rule is used

Marginal product of input 1/ price of input 1 = marginal product of input 2/ price of input 2

For many inputs it is ensured that this rule is followed which implies that the ratio of marginal product of a given input to its price should be same for all inputs.

in all of these cases marginal product of an input is the addition made to the total product when one more unit of that input is hired.