8A.2 Cost Minimization Flashcards
What is an isocost line?
An isocost line shows alternative combinations of factors that a firm can buy for a given total cost.
What does the slope of each isocost line reflect?
The slope of each isocost line reflects relative factor prices.
What dose a series of parallel isocost lines reflect?
For given factor prices, a series of parallel isocost lines will reflect the alternative levels of expenditure on factor purchases that are available to the firm. The higher the level of expenditure, the farther the isocost line is from the origin.
Where must the cost-minimizing method of production be on the graph?
The cost-minimizing method of production must be a point on an isoquant that just touches (is tangent to) an isocost line.
What is possible if the isoquant cuts the isocost line?
If the isoquant cuts the isocost line, it is possible to move along the isoquant and reach a lower level of cost.
When is a movement in either direction along the isoquant a movement to a higher cost level?
Only at a point of tangency is a movement in either direction along the isoquant a movement to a higher cost level.
Where is the least-cost position given graphically?
The least-cost position is given graphically by the tangency point between the isoquant and the isocost lines.
What is the slope of the isocost line?
The slope of the isocost line is given by the ratio of the prices of the two factors of production.
What has occurred when the firm has reached its cost-minimizing position?
When the firm reaches its cost-minimizing position, it has equated the price ratio (which is given to it by the market) with the ratio of the marginal products (which it can adjust by changing its usage of the factors). In symbols,
MPL/MPK = pL/pK
What does an increase in the price of labor do to an isocost line?
An increase in the price of labor pivots the isocost line inward, increasing its slope.
What does a change in relative factor prices cause?
Changes in relative factor prices will cause a partial replacement of factors that have become relatively more expensive by factors that have become relatively cheaper.
A rise in the price of one factor with all other factor prices held constant will …
(1) shift the cost curves of products that use that factor upward and
(2) lead to a substitution of factors that are now relatively cheaper for the factor whose price has risen.
Explain duality
Maximizing profit and minimizing costs are two sides of the same coin
