As the firm reduces capital and hires more labor it moves from D to E. As more labor is hired the Marginal Product of Labor falls (remember diminishing marginal product?). As less capital is employed the Marginal Product of Capital rises. Also, providing labor with less capital reduces MPL and providing Captial with more labor increases MPK.

    The firm has reduced costs but it still isn't hiring factors optimally, in fact the following is still true:

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