Answer to Question #131581 in Microeconomics for sahar

Question

I. A 15 per cent increase in all inputs leads to only a 5 per cent increase in the output. Are the returns to scale increasing, constant or diminishing? Illustrate your answer
II. What is the slope of an iso-cost line equal to and why? Provide mathematical explanation
III. “By definition, cost is zero if a firm does not hire any input. Hence cost-minimization essentially means shutting down the operation of the firm.” Do you agree with the statement? Justify you answer by giving an explanation from microeconomic theory.
IV. What is meant by an expansion path? Illustrate expansion paths for a normal input and an inferior input.

Answer 1

i)The inputs have a diminishing returns to scale because increase inputs at 15 percent is less than the proportional increase in output at 5 percent.

ii)Isocost line is a line that represents combination of factors of production that have the same total cost.The slope of the iscost is a line that represents the relationship of one factor of production with the other.

iii)Cost zero is a point in bussiness where the input cost is zero which means that the statement is true,while cost minimization  is a basic rule used by producers to determine what mix of labor and capital produces output at the lowest cost therefore the statement is false.

iii)Expansion path is curve in a graph with quantities of two inputs.It is the path that connects optimal input combination as the scale of of production expands.

Normal and inferior input

A normal input is an input that increases its proportion in its production mix as it increases production. In normal inputs,the expansion path has a positive slope.For inferior input, its an input whose proportion decreases as the firm switches to other inputs at higher production level. The expansion path for an inferior input has negative slope.