Suppose that the following combinations of inputs can be used
to produce 25 units of a commodity.
Units of Labour
6
8
9
12
Units of Machinery
12
9
8
6
Suppose that the input prices are 20 per unit of labour and 12
per unit of machinery.
Draw the iso-cost curve associated with 240 units of cost.
Among the combinations of inputs given, which one minimizes the
cost of producing 25 units of the commodity? Show your
reasoning.
Suppose, now, that labour decreases in price to 15 per unit,
while the price of machinery remains at 12 per unit.
Draw the iso-cost curve associated with 240 units of cost.
Among the combinations of inputs given, which one now minimizes
the cost of producing 25 units of the commodity? Show your
reasoning.
If an alternative product were available at an unchanged price
(say because it is produced somewhere else), what do you think
would happen to the economic rent available to producers of this
commodity if the prices of inputs were to change from the situation
in part (a) to the one in part (b)? What might producers do after
this change in economic rent?