Answer to Question #154266 in Microeconomics for Ravi

Question

Consider a firm in a competitive industry with the production function Y = max {K, L}, where Y denotes the quantity of output, and K and L denote the amount of capital and Labour used. Suppose w is the wage rate for per unit of labor employed and r is the rent for per unit of capital such that r > w. The Expansion path is given by

Answer 1

Expansion path is a graph which shows how a firm's cost minimizing input mix changes as it expands production. It traces out the points of tangency of the isocost lines and isoquants.

To derive the expansion path we need to find marginal products of labor and capital, put them into equation MPL/w = MPK/r, and solve the equation.