Question

a. In the graph, draw an isoquant for a production process in which Land K are perfect one- for-one substitutes. b. Assume the wage rate is greater than the rental rate for capital. In the graph, draw the firm's cost minimizing isocost line as a dashed line. c. Clearly indicate what the cost minimizing amount of labor L* and capital K* would be.

Answer 1

in process perfect case are one for a) Isoquant for production which L and K substitutes Equation for iso quant f(L,K) LtK one K 6 un dk = -1 4 slope of Iso quant IL sign just indicates negative slope. L+K=6 ve 2 L+K=2 L + 2 3 4 5 6 b) > rent for capital (de) Isocost line wage rate (W) Equation for WLt e K Slope of isocost c 7 Total cost line awl r ८ ve sign just indicates negative slope wyr 7 > و r line is steeper than This implies that isocost iso quant K optimal point (4*) 6 3 7 기 L+K=6 L+K=2 L+K=4 ) 2 3 5 6

Since L and K are perfect substitutes and rote > rent of capital wage It does not sense for the firm make to hire lobour because labour any is expensive Whatever labour the firm requires it can use in place capital of it 와 which is cheaper A general diagram can be drawn K K Isocost line Isoquants En cost minimizing amount of L* and L O at which Point K * is the optimal point OE and L *=o -X -X RU HOPE THIS HELPS