Question

1) What is an iso quant and iso cost line? Explain with example

2) Given, Q= F( 3K + 5L), what is the name of this production function and what does it specify regards use of capital and labor?

Answer 1

Ans 1: Isoquant: It shows all the combination of two inputs which produces the same level of output for a firm. It is just like firm's indifference curve. The general shape of isoquant is convex to origin, just like a consumer's indifference curve but labor on x-axis and capital on y-axis.

Whereas, isocost line is like firm's budget line. An isocost line shows the combination of two inputs which the firm can purchase with given amount of money. For example, if we have two inputs, labor and capital, then the price of labor is wage rate and price of capital is rental rate, so the equation of isocost line will be:

w*L + r*K = C

where, w = wage rate

L = units of labor force

r= rental rate of capital

C = units of capital

C = Total Cost

Ans 2: Q = 3K + 5L

Since, the MRTS (marginal rate of technical susbtitution) is constant.

We can check it by calculating MRTS = first order partial differentiation of Q wrt L / first order partial differentiation of Q wrt k

We get MRTS = 5/3 which is constant.

Which means that it is a perfect substitute production function in which the firm will treat capital and labor as perfect substitute in the production process. The shape of the isoquant for this particular type of production function will be downward sloping straight line.