How does a firm use input prices to choose between capital-intensive production and labor-intensive production?
The firm examines the many different production technologies that exist. Some technologies use more labor and some use more capital. The firm then computes the cost of the technology by multiplying the cost of labor times the amount of labor used and multiplying the cost of capital and the amount of capital used. The two totals are added together to get the total cost of production. Whichever technology has the lowest cost of production will be chosen. This will be a capital-intensive method of production if capital is relatively less expensive, or a labor-intensive method of production if labor is the relatively cheaper input.
