LN6 Flashcards
What are the two steps for Efficient Production?
- Determine all technologically efficient combinations of inputs L and K for producing quantity Q
- Choose the combination of inputs that is least costly
A line showing all combinations of L and K that can be purchased for the same cost
The Isocost Line
Input prices
The Isocost Line
What is the formula for total cost of production (C)?
C = wL + rK
w=wage
r=rent
Shows the rate at which labor can be substituted for capital with no change in total cost
Slope of the Isocost
Without increasing costs, how many units of capital must a firm stop using if it wants to employ another unit of labor
Slope of the Isocost
Replacement cost of L in terms of K
Slope of the Isocost
Isocost lines farther from the origin have a (higher/lower) cost
Higher
Given technological possibilities (production function) and input prices w and r, how do firms decide which inputs to use to produce a given quantity of output Q*?
First choose a combination of inputs (K and L) that will minimize the total cost of producing desired (given) output Q*
Must be located on the Q* isoquant (where Q* is the desired quantity)
Technological Efficiency
Must produce Q* at the lowest possible cost
Economic Efficiency
What are the two conditions that the cost-minimizing (“optimal”) bundle must satisfy?
- Technological Efficiency
2. Economic Efficiency
The firm will choose a combination of K and L that is last costly (on the lowest possible ascots line given f(K,L), w, r, and Q*)
Economic Efficiency
Cost is minimized at bundle where the slope of the isoqant ___ the slope of the isocost line
Equals
To minimize the cost of production, the firm chooses a bundle where the slope of the isoquant is equal to the slope of the isocost
Tangency Property of Cost Minimization
