Technology and Costs
Optimal technology
Isocost lines represent increasing levels of total cost the closer they are to the northeast (top right) of the graph. They represent decreasing levels of total cost the closer they are to the southwest (lower left) of the graph. Thus, firms should choose the technology that lies closest to the origin of the graph to minimize their total costs and make the most profit.
Use the tool below to compare the isocost lines of different technologies. Start by choosing the input prices for labor and electricity. See how this changes the slope and intercepts of the isocost line belonging to Tech A. Add more technologies to the figure, each using a different combination of labor and electricity to produce one unit of output. Which technology is optimal (has an isocost line closest to the origin)? Does the answer to this question change if you shift the price of labor and electricity?
Technologies and isocost lines
Exercise
A firm has the following available technologies:
- Technology A: 15 hours of labor and 10 units of electricity.
- Technology B: 5 hours of labor and 20 units of electricity.
- Technology C: 13 hours of labor and 15 units of electricity.
Is there any set of input prices such that Technology C is the least-cost technology?
- Try entering all technologies in the tool above. Fix the price of labor at 20 and vary the price of electricity between 15 and 25. What do you notice when both prices are 20? It should be clear that no matter how you change input prices, there is no combination such that C is the least cost technology.
- Try entering all technologies in the tool above. Fix the price of labor at 20 and vary the price of electricity between 15 and 25. What do you notice when both prices are 20? It should be clear that no matter how you change input prices, there is no combination such that C is the least cost technology.
- Try entering all technologies in the tool above. Fix the price of labor at 20 and vary the price of electricity between 15 and 25. What do you notice when both prices are 20? It should be clear that no matter how you change input prices, there is no combination such that C is the least cost technology.