Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 6] THEORY OF PRODUCTION 123
6.7 ISOCOSTS
Fig. 6-4
An isocost shows all the different combinations of labor and capital that a firm can purchase, given the total
outlay (TO) of the firm and factor prices. The slope of an isocost is given by 2P L /P K , where P L refers to the
price of labor and P K to the price of capital.
EXAMPLE 9. If the firm spent all of its tolal outlay on capital, it could purchase TO/P K units of capital. If the firm spent
all of its total outlay on labor, it could purchase TO/P L units of labor. Joining these two points by a straight line, we get the
isocost of the firm. The firm can purchase any combination of labor and capital shown on its isocost. The slope of the isocost
is given by
TO=P K
TO=P L
¼
TO
P K
P L
TO ¼
P L
P K
For example, if P L ¼ P K ¼ $1 and TO ¼ $10, we get the isocost of Fig. 6-5, with slope ¼ 21.
Fig. 6-5