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A firm is employing 100 hours of labor and 50 tons of cement to produce 500 blocks. Labor costs Rs 4 per hour and cement costs Rs 12 per ton. For the quantities employed MPL = 3 and MPC = 2. Show this situation in an isoquant-isocost diagram. Explain and show in the diagram, how the firm can produce the same output at a lower total cost.
Relationship between AC, AVC, AFC and MC is elucidated graphically by drawing respective cost curves in Figure below. Behaviour of cost curves is elucidated below. Figure:
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