Question:

Recommendation for a firm is a purely competitive market?

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A firm combines two resources, X and Y, to produce an output level Q in a purely competitive market. The cost of a unit of X is $15 and the cost of a unit of Y is $8. The marginal product of X is 30 units and the marginal product of Y is currently 24 units at output level Q. What would you recommend that the firm do given this resource combination?

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  1. For the firm to be maximising its potential, the ratio of MP(X)/MP(Y) should equal the ratio of p(X)/p(Y).

    MP(X)/MP(Y)=30/24

    p(X)/p(Y)=15/8

    Thus, in order to make the ratios equal, the firm needs to alter its use of the resources, since it can't change the prices.  Thus, it needs to use less X and more Y so that MP(X) rises and MP(Y) falls

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