Draw one convex-to-the-origin production isoquant

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Reference no: EM131484942

Question: In discussing appropriate technology for less-developed nations, we noted that given the relative labor abundance and relatively lower wages in the less-developed nations compared to the more developed economies, and the relatively higher price of capital, in many situations the optimal combination of labor and capital that should be used in the less-developed nations would be more labor-using and less capital-using compared to a higher-wage developed country.

a In a graph with the quantity of capital, K, measured along one axis and the quantity of labor, L, measured along the other, draw one convex-to-the-origin production isoquant, representing, say, 1,000 units of output for every combination of L and K on the curve. Also draw in an isocost line for a developed country which is tangent to the isoquant at some point. (You will remember that the slope of the isocost line is determined by the relative prices of K and L.) Note the quantity of K and L used on the axes.
Now, assuming that the price of a unit of K in the less-developed country is the same as in the more developed, but the wage rate is lower, show that the optimal combination of K and L to produce 1,000 units of output in the less-developed nation would use more labor and less capital than in the more developed economy. Prove, too, that the less-developed country would be the lower cost producer of the 1,000 units.

b What difference does it make to the way you draw the isoquant if, now, we assume that not all combinations of labor and capital are technologically feasible to produce 1,000 units of output? What will the isoquant look like if there are only two different combinations of K and L available, for example? What choice of technique (i.e. which combination of K and L) will the developed country and the less-developed country producer select?

Reference no: EM131484942

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