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Learning Objectives
Calculate and graph a firms isocost line Work out how the isocost line changes when resource prices or total cost change Make a map of production recipes (technology) using isoquants Explain the choices that firms make
An isocost line
K (machines rented)
C/R
A Numerical Example
Bundles of: Labor Machine rental ($3 per machine hour) 10 8 with C = $30 ($6 per labor hour) a b 0 1
c
d e f
2
3 4 5
6
4 2 0
10 8
a b
c
6 d 4 e 2 f 0 1 2 3 4 5 6 7 8 9 10
8
Labor, L (worker-hours employed)
The y-intercept shows the number of units of K that could be rented for $C.
The x-intercept shows the number of units of L that could be hired for $C.
11
10 8 6 4 2 0
A Change in W
$6
$10
h 2 3 4 5
f 6 7 8 9 10
12
Labor, L (worker-hours employed)
Changes in Cost
Capital, K (machines rented)
10 8 6 g 4 2 h 0 1 2 3 4 5 6 7 8 9 10
14
Labor, L (worker-hours employed)
W = $6; R = $3;C = $30
An Isoquant
Capital, K (machines rented)
12 10 8
Each point on a given isoquant represents different recipes for producing the same level of output.
i
6 4 2 j 0 1 2 3 4 5 6 7 8 9 10
17
Labor, L (worker-hours employed)
Quantity of Soybeans = 1 (kg./hour)
An Isoquant Map
Capital, K (machines rented)
9 10
m
Quantity of Soybeans = 2 (kg./hour)
k j
Quantity of Soybeans = 1 (kg./hour)
0 0 1
9 10
Cost Minimization
Capital, K (machines rented)
Choose the recipe where the desired isoquant is tangent to the lowest isocost.
12 10 8
C = $36
6 4 2
C = $18 W = $6; R = $3;C = $30
equ.
10
21
Conclusion: Buy resources such that the last dollar spent on K adds the same amount to output as the last dollar spent on L.
The |slope| of the isocost line = W/R. The |slope| of the isoquant = MPL/MPK
This will be demonstrated on the board.
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