Answer to Question #291473 in Microeconomics for Ekane

Question

Explain the concept of Isoquent and isocost and how they used to atain equilibrium

Answer 1

An isoquant curve, is one that illustrates the possible combinations of both labor and capital, applicable to the production of an output, referred toa as Total Physical Product (TPP). The curve applies the law of diminishing returns, making it concave to the origin. It applies, with a fixed capital, use of extra labor produces a declining marginal product, as the curve is capital against labor.

An isocost line on the other hand, shows the combination of labor and capital, with the same total cost. The isocost line is a straight line, similar to the budget constraint line, but other than resembling maximization of utility, it applies for cost-minimization for the two input factors.

At equilibrium point, the highest possible isoquant intersects with the isocost line. At this point, a firm maximizes profit, with minimum possible cost and highest achievable labor and capital combination (TPP). (Petri, 2021)

Reference.

Petri, F. (2021). Firms, Partial Equilibria and the General Equilibrium with Production. In Microeconomics for the Critical Mind (pp. 353-442). Springer, Cham. https://doi.org/10.1007/978-3-030-62070-7_5