Chapter 13

• What is an isoquant?

  A curve representing combinations of different factors of production that produce the same level of output.
• What is an isocost line?

  A line representing combinations of factors that cost the same amount of money.
• What is the goal of firms in choosing input combinations?

  To produce a given level of output at the lowest possible cost.
• How do firms find the least-cost input combination?

  By finding the point where an isoquant is tangent to an isocost line.
• What are the main types of production processes based on input ratios?

  Labor-intensive, capital-intensive, and land-intensive.
• What is the marginal rate of technical substitution (MRTS)?

  The rate at which one input can be substituted for another while maintaining the same level of output.
• What does the MRTS represent on an isoquant?

  The negative slope of the isoquant.
• How is an isocost line derived?

  From the prices of labor and capital and the total cost equation.
• What is the slope of an isocost line?

  The ratio of the prices of labor and capital.
• What ensures production is achieved at minimum cost?

  The point where the MRTS equals the ratio of the prices of inputs: $\text{MRTS} =$$\frac{P_L}{P_K}$.
• Give an example of an optimal input combination calculation.

  With $Q =$$50LK$, $P_L =$$€10$, $P_K =$$€40$, to produce 1000 units, $L =$$40$, $K =$$10$, total cost $TC =$$€800$.
• What happens when the cost of production factors changes?

  Isocost lines shift, altering the optimal input combination.
• What does adjusting one factor of production and increasing another help maintain?

  Maintains output without increasing costs.
• How does this model help businesses?

  It explains decisions like restructuring and outsourcing to improve efficiency and productivity.
• A firm's rate of technical substitution is represented graphically by the negative of the slope of the isoquant at the relevant point.
• • As we have seen, the slope of the isoquant shows us how we cansubstitute labour for capital (or vice versa) and stay at the same production level.
  • Given that a reduction in labour input (capital input) always needs to be compensated by an increase in capital input (labour input) in order to stay at the same production level, the MRTS is a negative value, equal to the negative of the slope of the isoquant at the relevant point.
• A line that represents combinations of factor inputs for a given budget is called

  An isocost line
• An isocost line represents different combinations of factor inputs which can be purchased with a given budget.
• Consider the example, a case in which L=€6 per hour, K=€10 per hour, and the budget = €160 an hour. Then the isocost line is described by the equation:

  K=16-0,6L
• The cutting point of least-cost input occurs where the isocost line is tangential to the production isoquant curve. This is where the marginal rate of technical substitution equals the ratio of the prices of input factors.
• What is the marginal rate of technical substitution?


  The rate at which one factor input can be substituted for another at a given level of output. The MRTS is the ratio of the marginal products of labour and capital

  $MRTS=$$MP_L/MP_K$
• What determines the slope of an isocost line?

  It's determined by the ratio of the price of labour to capital.

  $P_L/P_K$
• If capital and labour were perfect substitutes, what would the shape of an isoquant be?

  The MRTS is a constant and the isoquant is a straight (decreasing) line.