Total Costfor producer= L(i+1)Total output = Q = 10L –L2Price of the output = $1L=Loan amountQ = Quantity of shoes produced. i= Interest ratea. Find the optimal interest rate for the moneylender who wants to maximize profit. Find the optimal loan amount that borrowers want to use to maximize their profit. Assume that if borrowers were not in this business of producing shoes, they would have worked in agriculture and earned an amount $16. [Hint: There are 2 equations and 2 unknowns] b. If moneylenders know that borrowers may default, set up the necessary equations to highlight this situation and graph it. Assume N time periods where N is not very large.

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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.