A firm that is trying to produce a given level of output Q₀ at the lowest possible cost will

Question

Quizplus · Accepted Answer

In order to produce the given output at the lowest possible cost, the firm should select the input combination at which an isocost line is tangent to the Q₀ isoquant. This is because at the point of tangency, the slope of the isocost line is equal to the slope of the isoquant, which means that the marginal rate of technical substitution (the rate at which the firm can substitute one input for another while keeping output constant) is equal to the ratio of input prices (the cost of one input relative to the cost of another). This is the point at which the firm is using the inputs in the most efficient manner (minimizing cost while producing the desired output). Selecting an input combination above or below the isoquant would result in either higher costs or lower output, respectively. Choosing to produce at a level where variable costs are less than or equal to fixed costs is not relevant to the given question.

A Firm That Is Trying to Produce a Given Level