Use the firm’s long-run cost-minimizing decision rule to explain the d

Use the firm’s long-run cost-minimizing decision rule to explain the differences in the relative use of capital and labor in agriculture in the United States and the Peoples Republic of China.

What will be an ideal response?

ANSWER

The rule for cost minimization states that inputs should be employed such that the ratio of marginal physical product to input price is equal across all of the inputs used in the production process. As the price of labor rises relative to the price of capital, this causes the firm to substitute capital for labor. In the United States, labor for agriculture is scarce relative to the amount of available capital. In China, just the reverse is true. Hence, the cost of labor relative to the cost of capital is much higher in the United States than in China. This situation leads agriculture to be more capital intensive in the United States and more labor intensive in China.