Economics 2150A/B Lecture Notes - Isoquant, Isocost, Tangent

• School: Western University
• Department: Economics
• Course: Economics 2150A/B
• Professor: Hugh Cassidy

Document Summary

Cobb-douglas: given q*, ie. isoquant, the goal is to find the lowest isocost line that reaches the q* isoquant. Total cost line can reach q* but it"s not the cheapest. Total cost line 2 can"t reach q* so we can"t afford it. Total cost line 3 is the lowest isoquant line, cheapest way to produce q* 2 steps: tangency condition slope of the isoquant = slope iso cost line. Mpl/w = mpk/r equate marginal products per dollar: substitute into isoquant q* = f(l,k) Sub in solution from step 1 into q*, then solve for l or k. Sub k = (w/r)l into q* = 2l1/2k1/2. Q* = 4, r = 4, w = 1. Q* = 2l1/2(w/r l) = 2l1/2 (w/r) 1/2 l1/2 = 2(w/r) 1/2 l. Perfect substitutes (linear) q = al + bk, mpl = a, mpk = b. Q* = 10, w= 3, r = 1, q = 2l+k.