Time is money

98 Part II: Considering Which Side You’re On in the Decision-Making Process

Table 6-2 illustrates the relationship between various values for labor and capital and a total product of 3,200 units for this equation.

Examining production isoquants: All input combinations are equal

The relationship between labor, capital, and the quantity of output produced in the previous equation is graphically described by using a production isoquant. A production isoquant shows all possible combinations of two inputs that produce a given quantity of output. Table 6-2 shows various combinations of labor and capital that produce 3,200 units of output.

Table 6-2 Two-Input Production Function

Labor L

25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400

Capital K

1,600 800 533.3 400 320 266.7 228.6 200 177.8 160 145.5 133.3 123.1 144.3 106.7 100

Total Product q

3,200 3,200 3,200 3,200 3,200 3,200 3,200 3,200 3,200 3,200 3,200 3,200 3,200 3,200 3,200 3,200

Chapter 6: Production Magic: Pulling a Rabbit Out of the Hat

Figure 6-2 illustrates the production isoquant, labeled q1, derived from Table 6-2 and the equation

In Figure 6-2, the curve labeled q1 represents all combinations of capital and labor that produce 3,200 units of output.

99

Figure 6-2:

This production isoquant shows all combinations of capital and labor that produce 3,200 units of output.

Thinking at the margin one more time

Earlier in this chapter, I define marginal product as the change in total product that occurs given one additional unit of an input. With a production isoquant, the amount of output you gain from using one more unit of labor is exactly offset by the amount of output you lose by using less capital.

Every input combination on the production isoquant produces the same level of output — output is constant. Capital can change by more or less than one unit. What is critical is that total product remains constant as you increase labor and decrease capital.