How are Isoquants different from Isocost? Illustrate using graphs.
Ans :
THE ISOQUANT CURVE
I.
A. The Isoquant curve contains all combinations of
2 inputs that produce the same total output.
II.
B. All points on an isoquant curve are technically efficient.
III.
C. The curve is bowed toward the origin because of the law of
diminishing marginal productivity.
IV.
D. The slope of the isoquant is called the "Marginal
Rate of Technical Substitution" (MRTS) or the "Marginal Rate of
Substitution (MRS).
V.
E. The absolute value of the MRS is equal to the Marginal
Productivity of the input on the x-axis divided by the Marginal Productivity of
the input on the y-axis.
VI.
MRS = MPx/MPy
VII.
F. As one moves down the isoquant, the MRS decreases. This is
called the law of diminishing MRS. (It follows from the law of diminishing
marginal productivity.)
VIII. G.
For every possible combination of inputs, there is an isoquant. The whole set
of isoquants is called the "isoquant map". The "isoquant
map" is a picture of the state of technology.
THE ISOCOST LINE
A. The isocost line represents all
combination of two inputs which have the same total cost.
B. Total Cost is equal to the unit cost of factor X (Px)
times the quantity of factor X (Qx) plus the unit cost of factor Y (Py) times
the quantity of factor Y (Qy).
Total Cost = Px*Qx +Py*Qy
C. The y-axis intercept is equal to Total Cost divided by the
price of factor y. The x-axis intercept is equal to Total Cost divided by the
price of factor x.
D. The intercepts can be connected with a straight line.
E. The absolute value of the slope of the isocost is equal to
the price of factor x divided by the price of factor y
Slope of isocost = -Px/Py
F. Shifts in the isocost line:
- If
the firm decides to spend more, the new isocost will shift outward
parallel to the old isocost.
- If
the price of factor x rises, the curve will rotate inward and become
steeper.
- If
the price of factor y rises, the curve will rotate inward and become
steeper.
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