Profit Maximization
The question that arises now is that of selection of a single point among various efficiency points that gives the maximum profit. Though points D, E and F are efficient resource allocation points, profit is probably different at each point.
To maximize profit, we will take help of efficient input rule discussed earlier when only one input is variable. A firm should employ each input until the marginal revenue product (MRP) of the input equals the input prices. With labour and capital as the variable inputs, the firm will maximize profits by hiring labour and capital until the marginal revenue of labour (MRPL) equals the wage rate (w) and until the marginal revenue product of capital (MRPK) equals the rental price of capital (r). That is
MRPL = w and MRPK = r
Since MR. MPL = w and MR. MPK = r
By dividing the former equation with latter we get
MPL/MPx = W/r
This gives the efficiency condition for optimal combination. From the points D, E and F, there is only one point where the MRPL = wand MRPK = r and the firm maximizes profits. The firm will be producing the best or profit maximizing level of output with the optimal input combination.
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