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Analyzing the isoquant and isocost curves

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Consider the following graph, and answer questions a through e.

Please see the attached MS Word document for the graph.

a. If the price of capital is $7.50 per unit what is the per unit price of labor?
b. How many units of labor should the firm use in order to produce 400 units of output at the least cost?
c. The minimum cost of producing 800 units of output is what?
d. How many units of capital should the firm use to produce 800 units of output at the lowest cost?
e. The minimum cost of producing 1,200 units of output is what?

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Solution depicts the steps to determine labor and capital units at a given output level with the help of given diagram.

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a. If the price of capital is $7.50 per unit what is the per unit price of labor?
Please refer to the isocost line, which is tangent to isoquant curve pertaining to output of 400 units,
Total cost=Maximum units of capital*price of capital=200*7.50=$1500
Per unit price of labor=Total Cost/Maximum units of labor=1500/300=$5

b. How many units of labor should the firm use in order to produce 400 units of output at the least cost?
Point at which isocost line is ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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