Frequent Exam Questions with Answers
The Least-Cost Rule and Isoquant Analysis
Chapter 11 ― Question 8
A firm employs 20 units of labour and pays $20 for each. It employs 20 units of capital and pays $60 for each. The marginal product of capital is twice that of labour. The firm should
- double labour
- substitute capital for labour
- increase labour
- double capital
*C. There are no figures for the marginal products of labour and capital. But you are told that MP of capital is twice that of labour. So you can invent a formula:
| MP of labour | MP of capital | 10 | 20 Or: | 40 | 80 |
| Price of labour | Price of capital | 20 | 60 | 20 | 60 |
The least-cost rule stipulates that the two fractions should be in the same ratio. The factor whose fraction has the higher value should be increased. This is labour.
Chapter 11― Question 9
A firm moves from one point on an isoquant curve to another on the same isoquant curve. Which of the following will not happen
- a change in the mix of the inputs
- a change in the quantity of output
- a change in the costs of production
*B. B will not happen because isoquant means "the same quantity". A movement along the isoquant curve is by definition a change in the mix of inputs and can therefore be a change in the costs of production.
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