1. Suppose that a firm uses inputs labour (L, measured in person hours) and capital (K, measured in machine hours) in the production of its output (Q) according to the production function Q= min{2L, 3K}. (1) Draw the isoquant line associated with 12 units of output. Remember to put K along the vertical axis and L along the horizontal axis. (2) Suppose that the price of labour is $2/person hour, and the price of capital is $4/person hour. What is the cost minimizing combination of labour and capital that produces 12 units of output. Illustrate this point on your graph, and explain your answer. (3) Suppose that the price of capital is fixed at $4 / machine hour, and that output is fixed at 12 units of output. What is the demand curve for labour? Explain your answer, and make the reference to your graph.

1. Suppose that a firm uses inputs labour (L, measured in person hours) and capital (K, measured in machine hours) in the production of its output (Q) according to the production function Q= min{2L, 3K}. (1) Draw the isoquant line associated with 12 units of output. Remember to put K along the vertical axis and L along the horizontal axis. (2) Suppose that the price of labour is $2/person hour, and the price of capital is $4/person hour. What is the cost minimizing combination of labour and capital that produces 12 units of output. Illustrate this point on your graph, and explain your answer. (3) Suppose that the price of capital is fixed at $4 / machine hour, and that output is fixed at 12 units of output. What is the demand curve for labour? Explain your answer, and make the reference to your graph.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Isocost and Isoprofit Curve Analysis

An isocost curve in the production theory that is a crucial part of economics depicts different combinations of factor inputs at a given market cost. In other words, this shows all the combinations of production factors that cost the same for the firm to employ. Usually, this can be depicted as a downward sloping straight line when the firms act as the price-takers in the factor markets. The slope of this mainly depicts the relative prices of different production factors.

Question

1. Suppose that a firm uses inputs labour (L, measured in person hours) and capital (K, measured in
machine hours) in the production of its output (Q) according to the production function
Q= min{2L, 3K}.
(1) Draw the isoquant line associated with 12 units of output. Remember to put K along the vertical
axis and L along the horizontal axis.
(2) Suppose that the price of labour is $2/person hour, and the price of capital is $4/person hour.
What is the cost minimizing combination of labour and capital that produces 12 units of output.
Illustrate this point on your graph, and explain your answer.
(3) Suppose that the price of capital is fixed at $4 / machine hour, and that output is fixed at 12
units of output. What is the demand curve for labour? Explain your answer, and make the
reference to your graph.

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