7. The following figure shows a firm\'s isoquant for producing 2,000 units of ou

Question

7. The following figure shows a firm's isoquant for producing 2,000 units of output and four isocost curves. Labor and capital each cost $50 per unit. 400 200 100 Q 2.000 100 200 300 400 500 Units of labor a. At point A, the MRTS is (less than, greater than, equal to) the input price ratio, wir. The total cost of producing 2,000 units of output with input combination A is b. By moving from A to B, the firm -(increases, decreases) labor usage (increases, decreases) capital usage. At point B the MRTS is greater than, less than, equal to) the input price ratio, wir. The (increased, decreased) total cost by movement from A to B At Point D the firm 2,000 units of output. The MRTS is the input price ratio, wr c. (minimizes, maximizes) the cost of producing (greater than, less than, equal to d The optimal input combination is units of labor and units of capital. At this combination, the total cost of producing 2.000 units is s At point E, the MP per dollar on E is S The movement from E to F reduces the MP per dollar spent on_ increases the MP per dollar spent on e. spent on is less than the MP per dollar spent The total cost of producing 2,000 units of output with input combination f. This movement (greater than . The firm would not use this combination to (increased, decreased) total cost by S- & At input combination D, the MP per dollar spent on labor is less than, equal to) the MP per dollar spent on capital. h Input combination C costs $ produce 2,000 units of output because

Explanation / Answer

Units of output = 2000

Cost of capital = $50 per unit

Cost of labor = $50 per unit

d) The optimal input combination is 100 units of labor and 200 units of capital.

Note: That is, at Isoquant tangency.

Total Cost = PL * L + PK * K = (50 * 100) + (50 * 200)

TC = 5000 + 10000 = $15000

At this combination, the total cost of producing 2000 units of output is $15,000.

e) At point E, the MP per dollar spent on labor is less than the MP per dollar spent on capital.

Note: More units of capital used than units of labor

Total Cost = PL * L + PK * K = (50 * 50) + (50 * 360)

TC = 2500 + 18000 = $20500

The total cost of producing 2000 units of output with input combination E is $20500.

f) The movement from E to F reduces the MP per dollar spent on labor and increases the MP per dollar spent on capital.

Note: Units of capital used are reduced from 360 to 300. While that of labor increased from 50 to 60.

Total Cost = PL * L + PK * K = (50 * 60) + (50 * 300)

TC = 3000 + 15000 = $18000

The total cost of producing 2000 units of output with input combination F is $18,000.

Change in TC = TC at E - TC at F = 20500 - 18000

Change in TC = 2500

This movement decreased total cost by $2,500.

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