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The price of a paper used by a cost-minimizing firm increases. The firm responds to this...

The price of a paper used by a cost-minimizing firm increases. The firm responds to this price change by changing its demand for certain inputs, but keeps its output constant. What happens to the firm’s use of paper?  ** dont respond if you're not sure of the answer**

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Answer #1

It is given that the firm is minimising its cost. We can assume that the firm is currently choosing a a combination of paper and other inputs at which the isocost and isoquant are tangent to each other.

When the price of paper is increased isocost line will tilt so that the original isoquant is now tangent to the new budget line but the combination of inputs will now change and now paper is used less and other inputs are used more.

Therefore we see that when the price of one input increases the firm can change the combination of inputs so that this input is now used in a lower quantity and other inputs are used in a greater quantity to produce the same level of output.

Otherinputs Initially the firm was using (X1, Y1) to produce Q at A. Now when price of X1 rises, the slope of the isocost line increases and become steeper. The firm produces same level of output so isoquant remains unchanged. The new selected combination is B where paper quantity is reduced to X2 and other inputs are used at a greater Qconstant value it is tilted to Y2 Y1 Flatter isocost line quantity at Y2 isocost lir X2 X1 Paper


answered by: ANURANJAN SARSAM
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