1. Is use of least-cost input combinations a necessary condition for profit maximization? Is it a sufficient condition? Explain. ANSWER Employment of least-cost input combinations is a necessary but not sufficientcondition for profit maximization. It is necessary because a failure to operate with aleast-cost input combination means that costs could be lowered and profits increasedat any given output level. It is not a sufficient condition because the cost-minimizinglevel does not incorporate any information concerning demand relations, andtherefore provides no information about the optimal level at which to operate: that is,information concerning demand relations must be added to the analysis to determinehow much to produce for profit maximization (an optimal level of output).In short, employment of a least-cost input combination will result in an optimal production of a target level of output. Conversely, employment of inputs such thatMRPi= Pi for each input will result in an optimal production of an optimal level of output. 2. “Output per worker is expected to increase by 10 percent during the next year.Therefore, wages can also increase by 10 percent with no harmful effects onemployment, output prices, or employer profits.” Discuss this statement. ANSWER This statement is correct so long as the projected increase in output per worker issolely due to an improvement in labor productivity and provided that the demand for output is also expected to rise. Gains in labor productivity are sometimes derivedfrom an improvement in worker skill due to education or experience, elimination of obsolete work rules, labor-saving technical change, and so on. When increases inoutput per worker can be directly attributed to such gains in labor productivity, acommensurate increase in wages can be justified with no resulting increase in output prices or decrease in employer profits.