Isoquant/isocost diagram and the least cost combination.

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Chapter 7.A, Problem 5P

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Isoquant/isocost diagram and the least cost combination.

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The Red Racer Company and the Blue Bomber Company are each capable of minimizing cost and producing 4,000 bicycles per month. Red Racer's factory is located in an area where the cost of labor is significantly less and the cost of capital is significantly more than the costs of labor and capital for Blue Bomber. Assume that each company has access to the same technology to produce bicycles and draw an isoquant/isocost diagram to illustrate why the cost-minimizing combinations of inputs for these companies are different. 1.) Using the line drawing tool, draw and label the isocost line for Red Racer's factory. 2.) Using the point drawing tool, plot and label the equilibrium value for Red Racer's factory. 3.) Using the line drawing tool, draw and label the isocost line for Blue Bomber's factory. 4.) Using the point drawing tool, plot and label the equilibrium value for Blue Bomber's factory. Note: Carefully follow the instructions above and only draw the required objects. Units of capital…

For a firm to maximize profit, it must minimize the cost of producing whatever quantity it produces. Use the isocost and isoquant tools to present a firm that is choosing the optimal levels of labor and capital (i.e., tools) to produce a certain quantity and a certain cost. Then, show in your diagram how this firm would respond if it were to expand and spend more on its inputs, assuming it is best for the firm to become more “capital intensive” as it grows. Comment on WHY a firm might best become more capital intensive as it expands, even when the relative prices of labor and capital remain unchanged.

Another farmer purchases nitrate and phosphate fertilizers to produce corn, and the more of any one input he uses, the lower the marginal productivity of that input. Suppose the farmer decides to maximize output for a given cost. (That is, imagine a given isocost line.) Suppose the price of nitrate is 36 cents per pound and the price of phosphate is 24 cents per pound. Moreover, suppose the farmer currently chooses an input combination such that the marginal product of a pound of nitrate is 4 bushels of corn and the marginal product of a pound of phosphate is 3 bushels of corn. Should the farmer use the current mix of nitrate and phosphate? Should he use more nitrate and less phosphate? Or, should he use more phosphate and less nitrate? Please carefully draw a diagram with pounds of nitrate plotted along the horizontal axis and pounds of phosphate plotted along the vertical axis to support your conclusion. Moreover, please report the slope of the isocost line. And please report the…