**Least Cost Combinations and Profit Maximizing Combinations**

**Updated 12/15/2016 Jacob Reed**

Quickly review profit maximizing and least cost combinations of resources then practice with a review game at the bottom. The first five questions are about utility maximizing combinations, and the second five questions are about profit maximizing and least cost combinations.

**Diminishing Marginal Returns**tells us that as a firm hires more units of a resource, the marginal product of those resources eventually diminishes.

**Marginal Product per Dollar**is a calculation of a marginal product to cost ratio for a firm’s hiring of an additional unit of a resource. The formula is marginal product divided by price of the resource (MP/P). So if the last worker hired has a marginal product of 15 and that worker costs $5, the marginal product per dollar is 3.

**Marginal Revenue Product**

**per Dollar**is a calculation of the marginal revenue product to cost ratio for a firm’s hiring of an additional unit of a resource. The formula is marginal revenue product divided by price of the resource (MRP/P). Using the example above, if each unit sells for $10 then the last worker has a marginal revenue product of $150 (15x$10). That means the marginal revenue product per dollar of the last worker hired is $30 ($150/$5)

**Least Cost Combination**occurs when a firm adjusts their employment of resources to minimize costs. The least cost combination is found where the marginal product per dollar for all the resources a firm employs are equal (MPL/PL=MPN/PN=MPC/PC). If the ratios are not equal, a firm would reduce cost by employing more of the resource with a higher MP/P and less of the resource with a lower MP/P.

**Profit Maximizing Combination**is exactly the same as least cost, except that marginal revenue product per dollar is used instead of marginal product per dollar. So the formula profit maximizing combination is (MRPL/PL=MRPN/PN=MRPC/PC).

Note: These resource combinations are very similar to utility maximization for consumers with combinations of goods and services.

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Content Review Page: Externalities

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