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Isocost
The prices of factors are represented by the isocost line .the isocost line plays an important role in determining what factors of production the firm will choose for the production.an isocost line shows various combinations of two factors that the firm can buy with the given outlay / expenditure. An isocostis defined as the locus of various combinations of factors which a firm can buy with constant outlay . the iso-cost line is also called the price line or the outlay line. Let us illustrate with the help of a table followed by its graph: We are considering a firm which is working under perfect competition in the factor markets.suppose the firm or the producer has 100 rupees to spend and the prices of the land and the labour are rs. 5 and rs. 10 respectively. Combination A B C Land 20 10 0 Labour 0 5 10 Total Expenditure 100 100 100
Plotting the points A,B and C , we get a line AC which is called the budget line or iso-cost line. Therefore , the slope of the iso-cost line can be proved to be equal to the ratio of price of labour(w) and price of capital(r) . The equation of iso-cost line line is: C=W.L + R.K Where, W = wage rate L = labour R = price per unit of capital K = the quantity of capital used
Each of the factor combinations A,B,C,D and E yields the same level of output. Moving down from combination A to combination B , 4 units of capital are substituted by 1 unit of labour in the production process without any change in the level of output. Therefore MRTS of labour for capital is 4 at this stage.Switching from input cobination B to input combination C involves the replacement of 3 units of capital by an additional unit of labour , output remaining the same , Thus the MRTS is now 3. Likewise MRTS of labour for capital between factor combination C and D is 2 and between factor combination D and E , it is 1.
MRTS of Labour for capital = slope = An Important point to be noted about MRTS is that it is equal to the ratio of the marginal physical products of the two factor.