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Homework answers / question archive / Diamond Brewery is re-evaluating its optimal combination of inputs (which are imperfect substitutes) as a result of recent union-negotiated wage increases

Diamond Brewery is re-evaluating its optimal combination of inputs (which are imperfect substitutes) as a result of recent union-negotiated wage increases. At the present time, the MP of labor on the production line is 10 cases of beer per hour and the price of a unit labor service (P_{L}) is $10/hour. The MP of capital is 12 cases of beer per hour, and the

price of a unit of capital's service (P_{K}) is $8/hour.

- Employ the least-cost input rule to determine whether the input combination at

Diamond Brewery is optimal. Explain why or why not.

** **b) If the present input combination is not optimal, how can Diamond Brewery reduce cost of production for a given output or increase output with a given total cost? (Explain whether and why the company should use more capital and less labor, or less capital and more labor.)

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