The figure below shows the isocost lines and the isoquant map for a firm producing golf tees. FIGURE 8-6
-Refer to Figure 8-6.
A) the firm has adjusted the factor prices to equate the ratio of marginal products of the factors.
B) the ratio of the marginal utilities of capital and labour is equal to the ratio of the prices of capital and labour.
C) the ratio of the marginal products of capital and labour is equal to the ratio of the prices of capital and labour.
D) the firm can adjust its employment of factors to reduce its total cost, with output unchanged.
E) the firm is at its cost-minimizing position for an output level of 4000 golf tees.

Question

The figure below shows the isocost lines and the isoquant map for a firm producing golf tees.  FIGURE 8-6
-Refer to Figure 8-6.
A) the firm has adjusted the factor prices to equate the ratio of marginal products of the factors. 
B) the ratio of the marginal utilities of capital and labour is equal to the ratio of the prices of capital and labour. 
C) the ratio of the marginal products of capital and labour is equal to the ratio of the prices of capital and labour. 
D) the firm can adjust its employment of factors to reduce its total cost, with output unchanged. 
E) the firm is at its cost-minimizing position for an output level of 4000 golf tees.

Quizplus · Accepted Answer

The point of tangency between an isocost line and an isoquant represents the cost-minimizing combination of inputs for a given level of output. At this point, the ratio of the marginal products of capital and labour is equal to the ratio of the prices of capital and labour. This is also known as the marginal rate of technical substitution (MRTS) and ensures that the firm is producing at the lowest cost possible for that level of output. Therefore, choice C is the correct option.

The Figure Below Shows the Isocost Lines and the Isoquant