Question

What does isoquant show? Explain (fully) why isoquants are convex to the origin of the graph....

What does isoquant show? Explain (fully) why isoquants are convex to the origin of the graph.

Suppose that a firm increases all of its inputs by 25% and, as a result, the firm’s output produced increases by 20%. Calculate the firm’s returns to scale elasticity. What type of returns to scale does the firm have in this range of production? Explain.

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Answer #1

An isoquant is a curve drawn through the set of points at which the same quantity of output is produced while changing the quantities of inputs of labour and capital.

An isoquant must always be convex to the origin. This is because of the operation of the principle of diminishing marginal rate of technical substitution. MRTS is the rate at which marginal unit of an input can be substituted for another input making the level of output remain the same.

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