ECON 438 Study Guide - Final Guide: Profit Maximization, Isocost, Isoquant
Document Summary
Consider again the two ways in which we can view the producer"s profit maximization problem. Answer: this is done in panel (a) of graph 12. 4. Since the producer choice set is convex, the horizontal slices represented by the isoquants must have the usual convex shape. Answer: it has decreasing returns to scale because the entire producer choice set is convex. Answer: the input prices give us the slope of the isocost lines which is ( w/r ). The isocost drawn in panel (a) is tangent at a implying that ( a,k a) is the cheapest input bundle that can produce the output level x a. Since the production process is homothetic, it implies that all isoquants have the same slope along the ray from the origin through a. This further implies that all cost minimizing input bundles for the various output levels (represented by the isoquants) lie on this ray.
