ISOQUANT An isoquant shows different combinations of two

• ISOQUANT: An isoquant shows different combinations of two factors of production L & K that yield the same amount of output Q. • Isoquants are level curves of the production function Q = F(L, K) much like indifference curves are level curves of the utility function.

Properties of Isoquants: (Compare and Contrast with Indifference Curves) • They are negatively sloped. • They are convex to the origin (Diminishing MRTS) • They do not cross. • Higher curves (to the NE) correspond to greater levels of output. • Are Positive Monotonic Transforms meaningful?

• Marginal rate of Technical Substitution: MRTS L, K: The MRTS L, K is defined as the amount of K one must give up to gain one unit of L such that total output remains unchanged. – The MRTS at a given combination of L & K is just the slope of the isoquant at that point.

• Returns to Scale: rate at which output changes when all inputs are scaled up or down. • Increasing Returns to Scale: When all inputs are scaled up by X% output increases more than proportionately (more than X%) • Decreasing returns to Scale: When all inputs are scaled up by X% output increases less than proportionately (less than X%)

• Homogeneity: A function Q = F(K, L) is said to be homogeneous of degree K if scaling all inputs up by some factor Alpha results in output going up by alpha raised to the Kth power.