Chat with AIExam 19: Producer Theory With Isoquants
Explain the similarities and differences between consumer choice theory and producer theory. More specifically, explain how a budget line and indifference curve are related to an isocost line and isoquant, and explain the importance of the tangency point.
(30) 
VerifiedIn consumer choice theory, consumer choice between two items to buy is based on the assumption that the consumer maximizes utility subject to a budget constraint represented by the budget line. The demand curve for a good is derived from the consumer's preferences represented by indifference curves.
In producer theory, instead of a choice between two items to buy, a firm chooses between labor and capital inputs. Also, instead of using budget lines and indifference curves, the firm's choice is based on isoquants, which show all the possible combinations of labor and capital that result in the same quantities of production, and on isocost lines, which show the combinations of capital and labor that have the same total costs. In this sense, the isoquant is analogous to the indifference curve, and the isocost line is analogous to the budget line.
The tangency point represents the optimal condition. In consumer choice theory, the tangency point represents utility maximization given the budget constraint; in producer theory, the tangency point represents cost minimization given a level of output.
Exhibit 8A-1 
-Refer to Exhibit 8A-1. A cost-minimizing firm would prefer producing at point C to producing at
-Refer to Exhibit 8A-1. A cost-minimizing firm would prefer producing at point C to producing at (26) VerifiedB
In a given isocost line, any combination of different inputs results in the same total cost.
(44) VerifiedTrue
A firm can minimize the total costs of producing a given output level at the point of tangency between an isoquant and the isocost line.
(26) Sketch a typical isocost line and isoquant where a firm is minimizing total cost for a given quantity of output. Suppose the price of labor rises and the price of capital doesn't change. What does the firm do to maintain the original level of output? How does its input use change?
(44) An isoquant indicates different combinations of outputs that can be used to yield the same amount of profits.
(30) Suppose the wage rate is $20 and the price of capital is $100. Graph the isocost line for a firm with a total cost of $400. What happens to the isocost line if the price of capital goes up to $200? Graph this isocost line, assuming that the firm maintains a total cost of $400. What happens to production in this case?
(37) We are looking at a graph with capital on the vertical axis and labor on the horizontal axis. If the price of labor increases, then the
(32) If a profit-maximizing firm is producing at the tangency between an isoquant and an isocost line, then a movement along the current isocost line
(30) A firm that maximizes output for a specific total cost is producing at the point where the isocost line is above the highest isoquant.
(33) The combination of two inputs that results in a given quantity of output at least cost occurs where
(33) A line that illustrates all the different combinations of two inputs that result in the same total cost is called a(n)
(40) 
Filters
- Essay(0)
- Multiple Choice(0)
- Short Answer(0)
- True False(0)
- Matching(0)