4 Why do some firms use lots of capital and not much labour, while others use very little capital and lots of labour? Recall that economic efficiency occurs when the firm produces a given output at least cost. Method D, which is technologically inefficient, is also economically inefficient.

It uses the same amount of capital as method B but 10 times as much labour, so it costs more. A technologically inefficient method is never economically efficient.

One of the three technologically efficient methods is economically efficient. But which method is economically efficient depends on factor prices.

In Table 9.3(a), the wage rate is £75 per day and the rental rate of capital is £250 per day. By studying Table 9.3(a), you can see that method B has the lowest cost and is the economically efficient method.

In Table 9.3(b), the wage rate is £150 per day and the rental rate of capital is £1 per day. Looking at Table 9.3(b), you can see that method A has the lowest cost and is the economically efficient method. In this case, capital is cheap relative to labour, so the method that uses the most capital is the economically efficient method.