Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 7.A, Problem 5P
To determine
Isoquant/isocost diagram and the least cost combination.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
The Red Racer Company and the Blue Bomber Company are each capable of
minimizing cost and producing 4,000 bicycles per month. Red Racer's factory is
located in an area where the cost of labor is significantly less and the cost of
capital is significantly more than the costs of labor and capital for Blue Bomber.
Assume that each company has access to the same technology to produce
bicycles and draw an isoquant/isocost diagram to illustrate why
the cost-minimizing combinations of inputs for these companies are different.
1.) Using the line drawing tool, draw and label the isocost line for Red Racer's
factory.
2.) Using the point drawing tool, plot and label the equilibrium value for
Red Racer's factory.
3.) Using the line drawing tool, draw and label the isocost line for Blue Bomber's
factory.
4.) Using the point drawing tool, plot and label the equilibrium value for
Blue Bomber's factory.
Note: Carefully follow the instructions above and only draw the required objects.
Units of capital…
For a firm to maximize profit, it must minimize the cost of producing whatever quantity it produces. Use the isocost and isoquant tools to present a firm that is choosing the optimal levels of labor and capital (i.e., tools) to produce a certain quantity and a certain cost. Then, show in your diagram how this firm would respond if it were to expand and spend more on its inputs, assuming it is best for the firm to become more “capital intensive” as it grows. Comment on WHY a firm might best become more capital intensive as it expands, even when the relative prices of labor and capital remain unchanged.
Another farmer purchases nitrate and phosphate fertilizers to produce corn, and the
more of any one input he uses, the lower the marginal productivity of that input. Suppose the
farmer decides to maximize output for a given cost. (That is, imagine a given isocost
line.) Suppose the price of nitrate is 36 cents per pound and the price of phosphate is 24 cents
per pound. Moreover, suppose the farmer currently chooses an input combination such that
the marginal product of a pound of nitrate is 4 bushels of corn and the marginal product of a
pound of phosphate is 3 bushels of corn.
Should the farmer use the current mix of nitrate and phosphate? Should he use more nitrate
and less phosphate? Or, should he use more phosphate and less nitrate? Please carefully draw
a diagram with pounds of nitrate plotted along the horizontal axis and pounds of phosphate
plotted along the vertical axis to support your conclusion. Moreover, please report the slope of
the isocost line. And please report the…
Chapter 7 Solutions
Principles of Economics (12th Edition)
Knowledge Booster
Similar questions
- You manage a store that mass-produces candies by teams of workers using assembly candy machines. The technology is summarized by the production function q = 3 LK where q is the number of candies per week in thousands, K is the number of assembly candy machines, and L is the number of labor teams. Each candy assembly machine rents for r = per week, and each team costs w = $1000 per week. Candy costs are given by the cost of labor teams and machines, plus $600 per thousand of candies for ingredients. Your store has a fixed installation of 2 candy assembly machines as part of its design. = $6,000 What is the cost function for your store – namely, how much would it cost to produce q candies? What are average and marginal costs for producing q candies? How do average costs vary with output? а. b. How many teams are required to produce 3 (thousands) candies? What is the average cost per thousand candies? You are asked to make recommendations for the design of a new production facility in the…arrow_forwardBased on the information provided in the table below, which of the three firms experiences economies of scale, constant returns to scale, and diseconomies of scale? (Please explain in details with graph) output TC of Firm 1 TC of Firm 2 TC of Firm 3 1 $100 $25 $50 2 $110 $60 $100 3 $120 $100 $150 4 $130 $160 $200 5 $140 $220 $250 6 $150 $280 $300arrow_forward4. Ikea Inc., a home remodeling business. The number of square feet they can remodel in a day is described by the Cobb-Douglas production function Q= F (L,K)= 4K"L* where I. is their number of workers and K is units of capital. The wage rate is $5 a day, and a unit of capital costs $20 a day. What is their minimum cost input combination for remodeling (Q=200) 200 square feet a day? What is the total minimum cost level?arrow_forward
- Confused and uncertain on what to do to solve correctlyarrow_forwardThe following table shows the capital and labor requirements for 10 different levels of production. Assuming that the price of labor (PL) is $8 per unit and the price of capital (PK) is $6 per unit, compute and graph total cost, marginal cost, and average cost for the firm. To do this, fill in the total cost for each output level in the table below. (Enter your responses as whole numbers.) 9 0 1 2 3 4 5 6 7 8 9 10 K 0 20 20 20 20 20 20 20 20 20 20 L 0 3 7 10 13 17 23 31 41 53 67 TC 0 Cost per unit ($) 0 1 2 3 4 5 6 7 8 9 10 11 12 Units of output Q ✔arrow_forward20.3 (0) A firm uses labor and machines to produce output according to the production function f(L, M) = 4L/2 M/2, where L is the number of units of labor used and M is the number of machines. The cost of labor is $40 per unit and the cost of using a machine is $10. (a) On the graph below, draw an isocost line for this firm, showing com- binations of machines and labor that cost $400 and another isocost line showing combinations that cost $200. What is the slope of these isocost lines?. (b) Suppose that the firm wants to produce its output in the cheapest possible way. Find the number of machines it would use per worker. (Hint: The firm will produce at a point where the slope of the production isoquant equals the slope of the isocost line.) (c) On the graph, sketch the production isoquant corresponding to an output of 40. Calculate the amount of labor and the number that are used to produce 40 units of output in the cheapest possible way, given the above factor prices. Calculate the…arrow_forward
- Instructions: Move the slider at the bottom of the diagram to change the quantity of labor hired for both graphs and the table. Move the production slider to 6 units of labor. Suppose you had the information for the L=2 row and the L=6 row, but the row(s) in between them were missing and you didn't have any information in the Marginal Product column. If you wanted to estimate the marginal product, you might assume the marginal products of each of the 4 additional workers are equal. a. Estimate the marginal product of each additional worker if L were to increase from 2 to 6. b. Calculate the slope of the total production function between L=2 and L=6.arrow_forwardIn the isoquant/isocost diagram to the right, suppose that the firm is producing 1,000 units of output at point A using 100 units of labor and 200 units of capital. As an outside consultant, what actions would you suggest to management to improve profits? The firm can cut costs by hiring more and less Units of capital (K) 300- 250- A 200- 150- 100- 50- B q = 1,000 0 50 100 150 200 250 300 Units of labor (L) Q ☑arrow_forward. Suppose that a firm’s production function is . The cost of a unit of labor is $20 and the cost of a unit of capital is $80. The firm is currently producing 100 units of output, and has determined that the cost-minimizing quantities of labor and capital are 20 and 5 respectively. Graphically illustrate this situation on a graph using isoquants and isocost lines. The firm now wants to increase output to 140 units. If capital is fixed in the short run, how much labor will the firm require? Illustrate this point on your graph and find the new costarrow_forward
- Discuss whether economies of scale have any relevance to such companies as Wal-Mart.arrow_forwardThe following table shows the capital and labor requirements for 10 different levels of production. Assuming that the price of labor (PL) is $9 per unit and the price of capital (PK) is $6 per unit, compute and graph total cost, marginal cost, and average cost for the firm. To do this, fill in the total cost for each output level in the table below. (Enter your responses as whole numbers.) q 0 1 2 3 4 5 6 7 8 CO 00 9 10 K 0 20 20 20 20 20 20 20 20 20 20 102 L 6 9 12 16 22 30 40 52 66 TC 0arrow_forwardThe following table shows the capital and labor requirements for 10 different levels of production. Assuming that the price of labor (P, ) is $5 per unit and the price of capital (PK) is $9 per unit, compute and graph total cost, marginal cost, and average cost for the firm. To do this, fill in the total cost for each output level in the table below. (Enter your responses as whole numbers.) K TC 1 20 3 20 7 3 20 10 4 20 13 20 17 6. 20 23 7 20 31 3 4 5 6 i & Units of output 0 1 7 10 11 12 8. 20 41 20 53 10 20 67 LO Cost per unit ($)arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials of Economics (MindTap Course List)EconomicsISBN:9781337091992Author:N. Gregory MankiwPublisher:Cengage Learning
Microeconomics: Principles & PolicyEconomicsISBN:9781337794992Author:William J. Baumol, Alan S. Blinder, John L. SolowPublisher:Cengage Learning
Essentials of Economics (MindTap Course List)
Economics
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Microeconomics: Principles & Policy
Economics
ISBN:9781337794992
Author:William J. Baumol, Alan S. Blinder, John L. Solow
Publisher:Cengage Learning