"both output maximization and cost minimization leads to the same input combination " Do you agree? explain in 200 words
Answers
Answer:
In the theory of production, the profit maximisation firm is in equilibrium when, given the cost- price function, it maximises its profits on the basis of the least cost combination of factors. For this, it will choose that combination which minimises its cost of production for a given output. This will be the optimal combination for it.
This analysis is based on the following assumptions:
1. There are two factors, labour and capital.
2. All units of labour and capital are homogeneous.
3. The prices of units of labour (w) and that of capital (r) are given and constant.
4. The cost outlay is given.
5. The firm produces a single product.
6. The price of the product is given and constant.
7. The firm aims at profit maximisation.
8. There is perfect competition in the factor market.
Explanation:
Given these assumptions, the point of least-cost combination of factors for a given level of output is where the isoquant curve is tangent to an isocost line. In Figure 15, the isocost line GH is tangent to the isoquant 200 at point M. The firm employs the combination of ОС of capital and OL of labour to produce 200 units of output at point M with the given cost-outlay GH.
At this point, the firm is minimising its cost for producing 200 units. Any other combination on the isoquant 200, such as R or T, is on the higher isocost line KP which shows higher cost of production. The isocost line EF shows lower cost but output 200 cannot be attained with it. Therefore, the firm will choose the minimum cost point M which is the least-cost factor combination for producing 200 units of output. M is thus the optimal combination for the firm.
The point of tangency between the isocost line
and the isoquant is an important first order condition but not a necessary condition for the producer’s equilibrium.