in what way the least cost combination and output maximising combination of factors are determined?
Answers
Answer:
Least Cost Combination of Inputs:
The firm may produce a particular quantity of its product at each of the alternative input combinations that lies on the IQ for that quantity. Since the firm’s goal is to maximise profit, the optimum input combination for producing a particular quantity of its product would be one that would produce the output at the minimum possible cost.
The optimum input combination in this case is known as the least cost combination of inputs. In order to explain the firm’s selection of the least cost combination of inputs, let us suppose that some of the firm’s isoquants (IQs) and iso-cost lines (ICLs) are given in Fig. 8.12.
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Let us now suppose that the firm intends to produce a particular quantity q = q3 of its product, and the isoquant for this particular quantity is IQ3. In other words, if the firm uses any of the input combinations lying on IQ3, it would be able to produce the output quantity q = q3.
But, since the different points on IQ3, viz., S1, S2, S3, S4, S5, etc. lie on different ICLs, they produce the same output, viz., q = but at different levels of cost, For we know that a higher (or a lower) ICL represents a higher (or a lower) level of cost.
Therefore, in order to produce the output of q3 at the least possible cost, the firm would have to select that point on IQ3 that would lie on the lowest possible ICL. In Fig. 8.12, we see that the point S3 on IQ3 lies on the lowest possible ICL, viz., L3M3. Any other point on IQ3 lies on a higher ICL or a higher level of cost than L3M3.
Answer:
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