ISOQUANT: An isoquant shows different combinations of two factors of production L & K that yield the same amount of output Q. Isoquants are level curves.

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Presentation transcript:

ISOQUANT: An isoquant shows different combinations of two factors of production L & K that yield the same amount of output Q. Isoquants are level curves of the production function Q = F(L, K) much like indifference curves are level curves of the utility function.

Properties of Isoquants: (Compare and Contrast with Indifference Curves) They are negatively sloped. They are convex to the origin (Diminishing MRTS) They do not cross. Higher curves (to the NE) correspond to greater levels of output. Are Positive Monotonic Transforms meaningful?

Marginal rate of Technical Substitution: MRTS L, K : The MRTS L, K is defined as the amount of K one must give up to gain one unit of L such that total output remains unchanged. –The MRTS at a given combination of L & K is just the slope of the isoquant at that point.

Returns to Scale: rate at which output changes when all inputs are scaled up or down. Increasing Returns to Scale: When all inputs are scaled up by X% output increases more than proportionately (more than X%) Decreasing returns to Scale: When all inputs are scaled up by X% output increases less than proportionately (less than X%)

Homogeneity: A function Q = F(K, L) is said to be homogeneous of degree K if scaling all inputs up by some factor Alpha results in output going up by alpha raised to the Kth power.