Question

2. assume that a firm has convex isoquants, and its production function exhibits decreasing returns to scale (DRS).

   1. (10 pts) Draw an isoquant-isocost graph for two levels of output (q1=10 and q2=20) for this firm. Denote your cost-minimizing choices of capital and labor as (L1*, K1*) for output q1 and
      (L2*, K2*) for output q2. Use TC1 and TC2 to denote the total cost of each respective output level.

   2. (5 pts) How does your graph illustrate DRS? Explain.

   3. (5 pts) Using the information in part (a), sketch the LR total cost curve for this firm. Does the LR TC curve increase at a constant rate, at a decreasing rate or at an increasing rate?

Answer 1

Normally, Isoquant is the concept used by the producers to know at what level production is maximum and level of satisfaction is at highest level. under this various production level is considered in which labor and the capital is used and analysis the concept that at different level of labor and the capital the level of production is note.

This shows that if the producer uses more labor then caital is less required and if more capital is implmented in the process of production then less labor is required. this concept is called capital intensive technique and if more laboe than it is called labor intensive technique.

Isocost line is that line in which expense at various is considered and what expense on the labor is spend and what expense on the capital is spend so this isocost line indicate the flow of expense incurred on both labour and the capital .

where both the isoquant and the isocost line is interect to each other that concept is callled producer's equilibrium. it is that concept where producer are fully satisfied and the production is made at least cost at this level output is also maximum.

LRTC IS the cost function that represent the total cost of production for all goods produce it models this minimum cost over time input are not used as per the long run that is LRTC which is long run total cost curve of the firm in which all the cost are considerd and there is no difference between fixed cost and variable cost this curve is at the starting rising but after sometime after reaching the particular level this curve is flatter which shows that as the production increases the cost will remain constant .

Long run for a firm refers to absence of time based restreiction on the input and a firm can employ in its production technology on the other hand ideal cost curve assume technical efficiency because a firm always have incentive to be technically efficient in the long run all cost are variable and a firm make changes in the long run due to the following factors:

-New firm enter in the industry for expected profit.

-Existing firm leave the industry if firm suffer loses .

-Existing firm increase its plant capacity in order to increase profit.

-Firm can also decrease its plant facility as its suffer losses.

Long run curve is also known as planning curve or envelope curve

Graph Attached with explanation