Which of the following statements correctly characterizes the solution to a cost minimization problem with an interior solution?
A)The isoquant is tangent to the isocost line.
B)The isoquant lies to the interior of the isocost line.
C)The isocost line lies to the interior of the isoquant.
D)The distance between the isoquant and the isocost line is maximized.

Question

Quizplus · Accepted Answer

In a cost minimization problem with an interior solution, the point of tangency between the isoquant and the isocost line represents the combination of inputs that minimizes cost for a given level of output. This is because at the point of tangency, the slope of the isoquant (which represents the marginal rate of technical substitution between the inputs) equals the slope of the isocost line (which represents the ratio of input prices), ensuring that the firm is using the most cost-effective combination of inputs.

Which of the Following Statements Correctly Characterizes the Solution to a Cost