Question

Use the graph below for the following three questions: On 14 12 10 oc Units of capital, K A G B 4 102 2 1Q1 10 20 30 GO 70 80 40 50 Units ollabor, The graph shows units of labor (labeled L) on the horizontal axis, and units of capital (labeled K) on the vertical axis. A budget line intersects the vertical/capital axis at 10 units, and the horizontal/labor axis at 80 units. Two isoquants are drawn: the first is labeled IQ1 and is located closer to the origin (which means it is associated with a lower level of output): the second is labeled IQ2 and is located further away from the origin (which means it is associated with a higher level of output). Isoquant IQ1 intersects the budget line at two points the first is at a low level of labor and high level of capital and is labeled A the second is at a high level of labor and low level of capital and is labeled C. Isoquant IQ2 intersects the budget line at a single point of tannency it is at a medium level of both labor and canital and is labeled B

Answer 1

1 Ans: © It will exhaust its budget but its output will will stay the Same Isoquant shows the all Combinati- ons of Labour and capital which prou des same level of output throughout. Since point A and forint B lies on the same isoquant IQ1, therefore it will provide same lever of output. The form will exhaust all its budget point "C" lies on the budget line. because

3 Ans:-@ IQ 2 only, since we want the isuaquant to actually not interse- at the budget line at all. since IQ is tangent on the budg- et line and slope of the isugu- ant & slope line are equal at point B. Therefore the form will produce output represented by IQ2 only of the budget ② Auss- on the :-@ more Capital and less labour. and produces more output. → point B is at the higher iso quant Curve and it is tangent budget line, therefore Ilz is producing higher output then IQI