|The firm can choose from among different combinations of capital (K) and Labor (L) to produce a given level of output or faced with specified input prices, it can choose from among many combinations of K and L that would lead to fixed level of cost i.e. expenditure. Thus the firm has to make either of two input choice decision.|
- Choose the input combination that yields the maximum level of output possible with a fixed output (i.e. output maximization subject to cost constraint).
- Choose the input combination that leads to the lowest cost of producing a fixed level of output (i.e. cost minimization subject to output constraint).
Input Prices and Iso-costs
Production of a given Output at Minimum Cost
or, MPL/w = MPK/r