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9.d. Isoquants:: F (K, L) Q

1) An isoquant curve shows the combinations of inputs (such as labor and capital) that produce a specific level of output. Each isoquant represents a different output level. 2) The marginal rate of technical substitution (MRTS) represents how much of one input can be substituted for another while maintaining the same output level. It is equal to the slope of the isoquant curve and the ratio of the marginal products of the two inputs. 3) An isocost line shows the combinations of inputs that a firm can afford given input prices and a total budget. It represents equal total cost combinations of inputs for the firm.

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86 views2 pages

9.d. Isoquants:: F (K, L) Q

1) An isoquant curve shows the combinations of inputs (such as labor and capital) that produce a specific level of output. Each isoquant represents a different output level. 2) The marginal rate of technical substitution (MRTS) represents how much of one input can be substituted for another while maintaining the same output level. It is equal to the slope of the isoquant curve and the ratio of the marginal products of the two inputs. 3) An isocost line shows the combinations of inputs that a firm can afford given input prices and a total budget. It represents equal total cost combinations of inputs for the firm.

Uploaded by

Muhammad Fajar Agna Fernandy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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9.d.

Isoquants:
An isoquant (equal quantity) is a curve that shows the combinations of certain inputs such as
Labor (L) and Capital (K) that will produce a certain output Q. Mathematically, the data that an isoquant
projects is expressed by the equation

f (K,L) = Q

This equation basically says that the output that this firm produces is a function of Labor and Capital,
where each isoquant represents a fixed output produced with different combinations of inputs. A new
isoquant emerges for every level of output (See Figure 9.1). Isoquants have certain properties that resemble
that of indifference curves – convex to the origin, downward sloping, and nonintersecting curves.

KA =10 A

Q=25

B Q=15
KB = 2
Q=5

2 = LA 8 = LB L

Figure 9.1- An Isoquant Map


Each curve shows the rate at which L can be substituted
for K, or vice versa, while keeping output constant.

The Marginal Rate of Technical Substitution (MRTS) equals the absolute value of the slope. The
MRTS tells us how much of one input a firm can sacrifice while still maintaining a certain output level. The
MRTS is also equal to the ratio of Marginal Productivity of Labor (MPL): Marginal Productivity of Capital
(MPK). The mathematical form of how Labor (L) can be substituted for Capital (K) in production is given
by:

MRTS (L for K)= -dK/dL = MPL/MPK


For Example: When going from point B to A in Figure 9.1, the Slope = (8 units of Capital)/(-6 units of
Labor). The MRTS (L for K) = -(8/-6) = 4/3 between points B and A, which means that 4 units of Capital
can substitute for 3 units of labor.

Isocosts:
An isocost line (equal-cost line) is a Total Cost of production line that recognizes all combinations
of two resources that a firm can use, given the Total Cost (TC). Moving up or down the line shows the rate
at which one input could be substituted for another in the input market. For the case of Labor and Capital,
the total cost of production would take on the form:

TC = (WL) + (RK)

TC= Total Cost, W= Wage, L= Labor, R= Cost of Capital, K= Capital

Example: A company producing widgets encounters the following costs- cost of capital is $25000, labor
cost is $15000, and the total cost the firm is willing to pay is $150,000. Show the isocost line graphically.

150,000 = 15,000L + 25,000K

10 L

Figure 9.2 : Isocost Line


The slope of this line is Wage (W)/ Cost of Capital (R)
W/R= (-15,000)/(25,000)= -0.6
For every one unit of L the firm wants to hire, they
must give up 0.6 units of K

The equation represented by the data is: 150,000= (15000)L + (25000)K


Setting L=0, we find the y-intercept to be K=6. Setting K=0, we find the x-intercept to be 10 (See Figure
9.2)

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