Today's Question
Firms want to produce their target output at the lowest possible cost. This means finding the right MIX of inputs. If workers cost $20/hour and machines cost $10/hour, should a firm always use more machines than workers? What factor besides price determines the optimal input mix?
Model Answer
No! Price alone doesn't determine the optimal mix - you must consider how PRODUCTIVE each input is. If workers are twice as productive as machines, then even at higher wages, workers might be the better choice. The key insight: firms should equalize the 'bang per buck' - the marginal product per dollar spent should be equal across all inputs. Hire workers until MP/wage equals MP/rental rate for machines.