Use an Isocost-Isoquant Diagram to Explain How a Firm Determines

question 25

Essay

Use an isocost-isoquant diagram to explain how a firm determines the least cost combination of labour and capital to produce a given level of output.What is true of the marginal product per dollar at the least cost combination of capital and labour? Why?
B. In fact, point B is on the lowest isocost line. Since the isocost line and isoquant are tangent at point B, their slopes are equal at that point. The slope of the isocost line is - (wage rate/rental rate of capital) and the slope of the isoquant is equal to MP_L/MP_K. Thus, at point B
MP_L/MP_K = wage rate/rental rate of capital
MP_L/wage rate = MP_K/rental rate of capital
This last equation implies that, at the least-cost combination of capital and labour, the marginal product per dollar spent on labour must equal the marginal product per dollar spent on capital.
C. Since combinations A and C are on a higher isocost line, they would cost more than the combination represented by point

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