Question

If the production function has strictly isoquants and is differentiable, then there will always be an interior solution to the cost- minimization problem: productuon will use both point. Assume there are isocost curves.

Justify the above statement by providing reasons.

Answer 1

A production function refers to the maximum output that can be achieved with combination of given inputs.An isoquant describes all possible compination of inputs to produce maximum level of desired output.. It is also called as Equal Product Curve.

While an indifference curve mapping helps to solve the utility-maximizing problem of consumers, the isoquant mapping deals with the cost-minimization problem of producers.

  Isoquants show all values of inputs for which output is constant.if the distance between those isoquants increases as output increases, it exhibits decreasing firms production function. if the distance is decreasing as output increases, the firm experiences increasing returns which doubles inputs results.