Flashcards on Firm Production: Isoquants and Isocost Lines

Firm Production: Isoquants & Isocost Lines Explained

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How do a firm's costs depend on the time horizon (short run vs long run)?

Many costs are fixed in the short run but variable in the long run; therefore changes in production can raise average total cost more in the short run

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Costs of Production

20 cards

Card 1

Question: How do a firm's costs depend on the time horizon (short run vs long run)?

Answer: Many costs are fixed in the short run but variable in the long run; therefore changes in production can raise average total cost more in the short run

Card 2

Question: What does an isocost line represent?

Answer: All combinations of factor inputs that can be purchased with a given budget (total cost) at given input prices.

Card 3

Question: Write the isocost equation for capital (K) and labour (L) when capital costs R100 per hour and labour R60 per hour and total cost is R840. Then solve

Answer: 100K + 60L = 840; rearranged: K = 8.4 − 0.6L.

Card 4

Question: Using K = 8.4 − 0.6L, what is K when L = 6?

Answer: K = 8.4 − 0.6(6) = 4.8.

Card 5

Question: What determines the slope of an isocost line?

Answer: The slope equals the ratio of the price of capital to the price of labour (PK/PL).

Card 6

Question: What is the least-cost input combination?

Answer: The point where an isocost line is tangent to an isoquant—producing a given output at minimum cost.

Card 7

Question: State the condition for least-cost input choice in marginal product and price terms.

Answer: MP_L / MP_K = P_L / P_K (i.e., marginal rate of technical substitution equals the ratio of input prices).

Card 8

Question: Explain the practical implication when an isocost line is tangent to an isoquant.

Answer: That tangency gives maximum efficiency at minimum cost; the firm has no incentive to change the input combination.

Card 9

Question: If a firm has a fixed budget line (isocost) and three input choices A, B, and C lie on it, how can one determine which choice is least-cost for output

Answer: Compare outputs: the input combination on the isocost that yields the highest output (e.g., C) is the least-cost way to produce that output for the sa

Card 10

Question: How do changes in input prices affect the least-cost input combination and isocost lines?

Answer: If input prices change, the slope of the isocost changes and the least-cost combination moves; if both input costs change proportionally, the isocost