Question

8. A local pizza firm is employing 10 ovens and 50 workers to produce 1000 tasty gourmet pizzas. Ovens are $4000 each and workers are $12 per hour. For the input quantities employed, MP(ovens)=50 and MP(workers)=4. Show this situation in an isoquant-isocost diagram. Explain, and show in the diagram, how the company can produce the same output at a lower cost.

Answer 1

Given

• A local pizza firm is employing 10 ovens and 50 workers to produce 1000 tasty gourmet pizzas.
• Ovens are $4000 each and workers are $12 per hour
• MP(ovens)=50
• MP(workers)=4

Solution

Iso cost line will be based in total cost:

Total oven cost = 4000*10= $ 40,000

Total Labor cost=50*8*12= $ 4800

(We have took 8 hours per day per labor i.e we are assuming 8 hour per labor or per labor cost = 8*12=$ 96 )

Total cost is $ 40,000 + $ 4800 = 4= $ 44800,

Total ovens could be used = 44800/4000

= 11.2

Hence labor could be used is = 44800/96

=466.66 or 467

( So, Iso cost will be vertical intercept with 11.2 and horizontal intercept is 467 . Iso quant will be with 1000 pizzas)

( In the above figure we get that the 1000 number of pizzas could be produced at labor cost which is devoted by iso cost -2 line. The new iso cost line is with lower cost.)

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