Question

1) There is always a positive correlation between cost and output quantity, but in some cases we can observe negative correlation between output and the quantity of input. Draw a graph exemplifying this statement. Make sure you operationalize your graph with isoquants and isocost lines. For simplicty, assume input prices don’t change and one isoquant is associated with one more unit of output that the other isoquant.

Answer 1

Question :

Answer : The firm produces an output at the minimum cost of its input.

This point on isocost and isoquant graph is the tangency point of the curves.

The locus of all tangencies point is called the expansion path

Positive correlation shows, as output increases, amount of both input used increases i.e. both inputs are normal inputs. It shows an expansion path that moves forward and upward.

Negative correlation shows, as output increases, amount of one input increases and amount of another decreases. It shows a backward bending expansion path.