INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY; Charles van Marrewijk, 2006; 1

X = 10

X = 14

Constant returns to scale

7

21

Suppose 5 labour and 15 capital can produce 10 XThis is the isoquant associated with point A

Suppose we increase K and L by 40%

A15

5

Under constant returns to scale a proportional increase in inputs leads to a proportional increase in output

K from 15 to 21 and L from 5 to 7

Then output also increases by 40% from X = 10 to X = 14

B

Thus, the isoquant at point B is X = 14

L

K

0

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY; Charles van Marrewijk, 2006; 2

X = 10

X = 14

110

44

Increasing the inputs at A with 40% is equivalent to increasing the length of a line from the origin through A with 40%

This procedure can be repeated for any arbitrary point on the X=10 isoquant; here are a few

The X = 14 isoquant is a blow-up

B

100

40

A’

B’

But if A’ is another point on the X=10 isoquant we can use the same procedure to conclude that B’ must be also on the X=14 isoquant

L

K

0

Aradial

Constant returns to scale

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY; Charles van Marrewijk, 2006; 3

X = 10

7

21A

15

5

X = 14

L

K

0

For example, that if cost is minimized at point A for X = 10, then it is also minimized at the 40% radial blow-up of A (B) for X = 14

B

Thus, the slope of the isoquant at point A is the same as at point B

Constant returns to scale

Under constant returns to scale the isoquants are radial blow-ups of each other, which implies that drawing 1 isoquant gives information on all others

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY; Charles van Marrewijk, 2006; 4

X = 10

7

21A

15

5

X = 14

L

K

0

B

Constant returns to scale

10=F(15,5) If