Microeconomics for MBAs 36. The Economic Way of Thinking for Managers. Microeconomics for MBAs develops the economic way of thinking through problems that MBA students will find relevant to their career goals. Maths is kept simple and the theory is illustrated with real-life scenarios | Chapter 10 Production Costs in the Short Run and Long Run 23 curve IQ2. The firm is producing as much as it can -- 150 pairs ofjeans a day -- with an expenditure of 600. If it produces the same amount but used more labor on more capital it would move to a lower isoquant and a lower output level. A point b on curve IC1 for instance the firm would lower its production level from 150 to 100 pairs ofjeans per day. FIGURE Finding the Most Efficient combination of Resources Assuming the dial wage of each worker is 100 and the daily rental on each sewing machine is 20 an expenditure of 600 per day will buy any combination of resources on isocost curve IC1. The most costeffective combination of labor and capital is point a three workers and fifteen machines. At that point the isocost curve is just tangent to isoquant IQ2 meaning that the firm can product 150 pairs of jeans a day. If the firm chooses any other combination it will move to a lower isoquant and a lower output level. At point b on isoquant IS1 it will be able to produce only 100 pairs of jeans a day. Of course with increased expenditures the firm can move to a higher isocost curve. In figure as the firm s budget expands its isocost curve shifts outward from IC1 to IC2 to IC3. At the same time the firm s most efficient combination of resources increases from a to b and then to c. As expenditures on resources rise we can anticipate that beyond some point the increase in output will not keep pace with the increase in expenditure at that point the marginal cost of a pair ofjeans will rise. FIGURE The Effect of Increased Expenditures on Resources An increase in the level of expenditures on resources shifts the isocost curve outward from IC1 to IC2. The firm s most efficient combination of resources shifts from point a to point c. Chapter 10 Production Costs in the Short Run and Long Run 24 PERSPECTIVES Dealing with the Very Long Run Economic analysis tends to be restricted to either the short or .
