Q. Explain about isocost line?
In economics, an isocost line signifies all combinations of inputs that cost the same total amount. Though, similar to the budget constraint in consumer theory, use of the isocost line pertains to cost-minimisation in production as opposed to utility-maximisation. For the two production inputs, capital and labour, with fixed unit costs of the inputs, equation of the isocost line is
rK + wL = C
Where w signifies the wage rate of labour, r represents interest rate of capital,
K is the units or amount of capital used, L is the amount of labour used whereas C is the total costof obtaining these inputs.
Absolute value of the slope of the isocost line, with labour plotted horizontally and capital plotted vertically, equals the ratio of the prices of inputs of capital and labour. The isocost line is combined with isoquant map to determine the optimal production. This optimality is arrived at a point where an isoquant and isocost curves are tangent to each other. It makes sure that firm attains the highest level of possible output with a given isocost line. Therefore the output is produced at with least cost or most efficiently. This tangency may also be interpreted as one where slopes of the isoquant and the isocost are equal. This entails that tangency ensures that marginal productivities of the two inputs are proportional to the ratios of prices of the two inputs.