Question

Suppose the company E-bikes R US has an isocost line that crosses the isoquant twice. To cost minimize, E-bikes R US will

A) use a different isocost line to select the bundle of inputs.

B) use the input bundle associated with the intersection on the higher point of the isoquant.

C) use the input bundle associated with the intersection on the lower point of the isoquant.

D) Both B and C.

Answer 1

Answer - A) use a different isocosts line to select the bundle of inputs.

Explanation:

Isocost line - The isocost line refers to the all possible combination of labor and capital which represents the total cost or total amount.
Isoquant - Isoquant is a convex curve that represents all possible combination of inputs ( K and L) that gives an equal amount of output or total cost at all points on the isoquant curve.

The graphical representation of an isocost line that crosses the isoquant twice:

In the above graph, we can easily see that Isocost line 2 (I2) intersects isoquant twice as on point B and C. Both point B and C gives a different bundle of inputs. At point B there are K3 unit s of capital (K) and L0 unit of labor (L) and at point C there is K0, L3 bundle of inputs. The firm or company selects the input bundle ( A, B, and C) which gives output at a lower cost. That's why the firm (company E-bikes R US) is minimizing the cost to use a different isocosts line to select the bundle of inputs.