Principles of Microeconomics / Unit 6 MIC 0531 worked example, 60 to 90 seconds
Least-Cost Technology from Three Bundles
The idea
Given several input bundles that each produce the same output, and the prices of the inputs, cost each bundle: workers times the wage plus machines times the machine rental. Pick the cheapest. Then change one input price and cost them again; the choice moves away from the input that got dearer. The exercise shows that the least-cost method is not a property of the technology alone but of technology and prices together.
In practice
Worked example: a park can be cleaned by twelve workers with two machines, seven workers with four, or three workers with seven. At fifty dollars a worker and one hundred a machine, the bundles cost eight hundred, seven hundred fifty and eight hundred fifty, so the middle method wins. Raise the wage to eighty dollars: the costs become one thousand one hundred sixty, nine hundred sixty and nine hundred forty, so the machine-heavy method wins. Cut the wage to thirty: five hundred sixty, six hundred ten and seven hundred ninety, so the labor-heavy method wins.
Where people slip
Cost every bundle at the same prices before comparing; the error is to cost one bundle at old prices and another at new. And the cheapest bundle is cheapest for this output. A different output may have a different set of bundles and a different winner.
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