Question

2. (a) Given a firm's production function, what are properties of isoquants and the basis for substitutability of inputs (capital and labor)? (b) Show and discuss the choice of input combinations and the requirement for cost minimization. (c) What happens if the price of an input, such as labor, increases? Show graphically and explain.

Answer 1

pain. ՍՆԵՄՄՄ | N o primal production ՀՀց, Revs ։1 - է 2x Ցk e SLNKOPP * ? * Հ *-օ** Հ18,Հids 1: 2k 3 ye 2r 8 = e | Դ MRTS 1 Mets>I Ն Ա Ա Ն Ն Ն Ն Ն Ն Ն Ն Ն Ն Ն Ն Ա Ն Ա Ն *- - : id, c

A.Properties of Isoquants:

1.Isoquants curves slope downward from left to right because of diminishing marginal rate of technical substitution of labour and capital.

2.Isoquants are conves to the origin.This implies that MRTS diminishes along the Isoquant curve.

3.Two Isoquant curve can never cross each other.

A and B are on the same IC,i.e.,IC1 and A and C are on the same IC,i.e.,IC1.Therefore,C and B must be equal but B lies on a higher Isoquant curve.

4.Higher the Isoquant curve,higher the level of output.At higher level of Isoquant,both L and K are more.

5.Isoquants never tough an axis.It it touches an axis,it means that production occurs with only one factor of production.

On the Isoquant at point B,labour is abundant.Therefore,substitution of labour is more.However,on point C,labour because scarce and its substitution becomes difficult,therefore,less labour is substituted for capital.

B.MRTS=Change in units of labour/change in units of capital.

Optimal production path can take any shape based on MRTS.When there is equal substitution of L and L,MRTS is 1.

When L is substituted more for K,MRTS is >1

When L is less substituted for K,MRTS<1.The line segment traced from each point where Isoquant is equal to isocost line is called optimal production path.

C.When price on an input(labour)increases,the isocost line pivots to the left because the firm can afford less units of labour.Original M units of L and N units of K are employed.After price rise M' units of L and N units of K are employed.