Profit-Maximizing Behavior in Perfectly Competitive Factor Markets

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8 Terms

1
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Marginal Product per Dollar

The additional output produced per dollar spent on an input, calculated as

  • Marginal Product of Labor (MPL)/Wage Rate (W)

  • Marginal Product of Capital (MPK)/Rental Rate of Capital (R)

2
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Cost Minimization Rule

Firms minimize costs when the marginal product per dollar is equalized across all inputs, expressed as (MPL/W) = (MPK/R).

3
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Adjusting Input Mix

The process of changing the combination of inputs used by a firm to reduce costs by using more of the input that has a higher marginal product per dollar.

4
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Optimal Combination of Inputs

The ideal mix of labor and capital that allows a firm to produce a given level of output at the lowest possible cost.

5
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Marginal Product of Labor (MPL)

The additional output produced by employing one more unit of labor.

6
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Marginal Product of Capital (MPK)

The additional output produced by employing one more unit of capital.

7
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Wage Rate (W)

The cost of employing one unit of labor, typically expressed as a monetary amount per time period.

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Rental Rate of Capital (R)

The cost of employing one unit of capital, typically expressed as a monetary amount per time period.