Relative prices determine the slope of the budget line. Consider point R on isoquant Q 2, R is the point where the isoquant is positively sloping and therefore lies outside the ridge line. Find the firm's profit-maximizing output and price. The expansion path is also known as scale- line because it shows how the entrepreneur will change the quantities of the two factors when it increases the scale of production. It will be observed from the Fig.
Now, a glance at the Fig. In this case, the of input usages is always the same regardless of the level of output, and the inputs can be expanded proportionately so as to maintain this optimal ratio as the allowable total cost expands. All these and other various combinations are shown in Fig. Complex economic relations require more sophisticated methods of expression. Now that the wage rate is higher, that is, the labour is relatively more expensive, to produce the initial level of output, a producer will substitute capital for labour by moving upward along the isoquant Q 0. Further suppose that a firm has Rs. L represents the total payment made to labour.
Section — B Marks — 25 Attempt all questions — 1. It should also be noted that the slope of the iso-cost line, like that of the price line in indifference curve analysis of demand, is equal to the ratio of the price of two factors. The positively sloping segments of isoquants implies that marginal product of one of the factors has become negative. When price of petroleum increased many countries tried to substitute other types of energy resources using inputs such as coal, electricity to reduce costs of production. When this happens the ratio of the prices of factors is the same as the ratio of their marginal products. It is also known as the equal product curve.
When alternative courses of action are available, the decision that produces a result most consistent with managerial objectives is the optimal decision. Therefore, an equal product map represents the technical conditions of production for a product. The iso-cost line will also change if the prices of factors change, outlay remaining the same. Does the resulting output level maximize profit? As a result, the marginal product of the increasing factor first becomes zero and then it becomes negative so that isoquant becomes positively sloping. The 500 units of output can be produced by any combination of labour and capital such as R, S, E, T and J lying on the isoquant. More expensive inputs cause shifts in the opposite direction. There are various technical possibilities open to a firm from which it has to choose, that is, there are various combinations of factors which can yield a given level of output and from among which a producer has to select one for production.
This point is illustrated as point A. Our tutors are highly qualified and hold advanced degrees. The curve labeled q 1 represents all combinations of capital and labor that produce 3,200 units of output. An important property of a linear homogeneous production function is that its expansion path is straight line from the origin as shown in figure 18. Explain with the help of an example? In order to ascertain this minimum cost we substitute the maximum values of A and B procured above and the given prices of labour and capital i. Found everywhere from large corporations to nonprofits, in all sectors of the economy, this concept is a profoundly useful tool that helps leaders make sound business decisions.
Changes in input prices shift the isocost curve. At points J and T on the isoquant Q marginal rate of technical substitution of labour for capital is smaller than the price ratio of the factors and the entrepreneur will try to substitute capital for labour and move upward on the isoquant Q until he reaches the point of tangency E, where marginal rate of technical substitution is equal to the price ratio of the factors. In the real world there are several examples of factor substitution in response to changes in relative factor prices. What is the importance of emotional intelligence? All other X, Y combinations on the Q1 isoquant lie on higher budget lines. Explain the various type of incentive systems? But this is certain that where both factors are variable and the prices of factors are given, a rational entrepreneur will seek to produce at one point or the other on the expansion path. How the iso- cost line is drawn is shown in Fig. To answer this question, it becomes necessary to determine if marginal revenue product equals the marginal cost of each input.
Since, both capital and labour have to paid positive prices; it will be cheaper to produce a given quantity of output at point H than at point R. To get the level of output produced we substitute these amounts of capital and labour in the given production function. However, if with the new higher price of labour, the producer had used the factor combination E, he would have incurred still higher cost or expenditure for producing the output level Q 0. Hence E represents maximum-output factor combination. Explain Price, Cross and Income Elasticity of Demand used in managerial decision making process. A change in the budget level, B, leads to a parallel shift in the budget line; changes in input prices alter the slope of the budget line.
What do you mean by Locus of Control? Justify its use in the implementation of developmental projects. If the price of labour rises from Rs. Thus, the initial point E no longer minimises cost in the context of new relative factor prices. If factor prices change, firm will choose another factor combination which will minimise the cost of production for given output or maximise the level of output for a given cost Related Discussions:- Optimal input combination for maximisation of output, Assignment Help, Ask Question on Optimal input combination for maximisation of output, Get Answer, Expert's Help, Optimal input combination for maximisation of output Discussions Write discussion on Optimal input combination for maximisation of output Your posts are moderated. Similarly, rK is the total payment made for capital where r is the price per unit of capital and K is the quantity of capital used.
Obviously, with a given cost or outlay, a rational producer will be interested in maximising output of the commodity. Likewise, when factor combination is changed from 30B + 120A to 25B + 120A, the productivity decreases to 75 units that is 600 — 525. The cost-minimizing combination of labor and capital are the quantities L 0 and K 0. Find out the leverage ratio if the capital structure has Rs 4,00,000 equity and Rs 1,60,0 debt. In either case, factors would have to be used in optimal combination at which the cost of production will be minimum.