Question

please explain in detail

1. (10%) (Interlor Solutions) Consider the graph below which shows a firms isoquant for q = 100 and several isOcost lines, where C, < C2< C. Assume the firm is constrained to produce this 100 units and its goal is to minimize costs. к. В E 7-100 C,>C C>C a. Explain why the firm will not employ an input mix of capital and labor at point A. b. Using the last-dollar rule, explain why the firm will not employ an input mix of capital and labor at point B. At this point, should the firm increase labor or capital? Using the last-dollar rule, explain why the firm will not employ an input mix of capital and labor at point D. At this point, should the firm increase labor or capital? c. d. Explain why point E represents both a technologically efficient and economically efficient mix of labor and capital.

Answer 1

Answer conesden the graph beloso which shows a Perom isoquant for q =100 and several isocost lines, where G<<<z. Asume the füm is constrained to produce this too write and its goal is to mäni mize costs. A N āj - 100 a) Explain why the forum will not employ an impul mix of capital and labär at point a: Ala point d', the isocost dime is below the isoquant for 100 unit. The shows that the labòt- capital combination is not sufficient to produce 100 units of output. Hence the fram will not be operating at point A. using the last - della seule, explaining why the firm will not employ an imput mix of capital and labar at point 'B'. At this point, should the from increase labor & capital z

At the optimum position, the slope of the isoquant which is the marginal Rate of Technical subsktution MRTS must equal to the slope of the iso cost line which the station of the prices of labor and capital now Ale, we can see that the slope of the Isoquants is greater than the slope of iso cost line. This implies that, marginal Rate of Technical Subalikation > ratio of the prices of labot 1 and capital ove know thad ARTS equals the ratio of the marginal pecaduct of labor and Marginal product of capital Moriginal product of Labor . prúce of Labor marginal product of capital - price of capital . then it implies that the last dellae spent on labor adels role do the output than the last dallar spent on capital. Hence to achieve equality, the form should increase lebit. with given prices of labor and capital, increase in labor will Cause a decline in imp of labor. Thus resulting in the equality,

@ using the last - dollar rule, explaining eshy the Room will not employ an input mix of capital and labour at point D: At this point, should the foum increase labši ai capital. Al B, we can see that the slope of the Isoquanto is smaller than the slope of isocost line > Marginal Rate of Technical subslution < Ratio of the polices of Labor and capital. Hack et shows that the last dollar spent on labor adds des to the output then the last dollar spend on capital. Hence to achieve equality, the from should decrease labor. with given prices of labor and capital, a decrease in labor wsill calve an increase in MP of labor. This resulting in the equality. © Po Explaining why point tº represents both a technologically efficient and economically efficient more of labor and capital. now, Point 'e' represents the efficient mix.

Al e; Marginal Rate of Technical substitution = Ratio of the prices of labor and capital This implies that the last dollar spent on both laber and capital cause the cutput by the same amount.