In the context of cost minimization, how can a firm effectively use input substitution to manage variable costs while considering opportunity costs?

To minimize costs, a firm can use input substitution, which means replacing one type of resource with another to save money. For example, if a bakery finds that flour prices have increased, it might consider using a cheaper alternative like a different type of grain for some of its products. This helps to manage variable costs, which are costs that change with production levels. However, the firm also needs to think about opportunity costs, which are the benefits it misses out on by choosing one option over another. In our bakery example, if the new grain affects the taste or quality of the bread, the bakery might lose customers, which could ultimately hurt profits.