Illustrate isoquants having positively sloped segments. In the same diagram construct ridge lines and explain the concept of Economic Region of Production.

Understanding Isoquants with Positively Sloped Segments

Isoquants are curves that represent combinations of different inputs that yield the same level of output in production. Typically, isoquants have a negative slope, indicating that an increase in one input can compensate for a decrease in another while maintaining the same output level. However, in certain cases, isoquants can have positively sloped segments, which represent unusual production scenarios.

1. Characteristics of Positively Sloped Isoquants

Positively sloped segments in an isoquant imply that increases in both inputs are required to maintain the same level of output. This situation is atypical as it defies the usual principle of input substitutability. It suggests that the inputs are complements to such an extent that they cannot substitute for each other effectively. In such cases, the production process may involve essential fixed proportions of inputs.

2. Constructing Ridge Lines in the Isoquant Diagram

Ridge lines in an isoquant diagram represent the boundaries beyond which the productivity of one or both inputs decreases. They are drawn on either side of the isoquants, demarcating the region where production is most efficient.

a. The Left Ridge Line: This line indicates the point beyond which the productivity of one input (usually labor) begins to decrease. To the left of this line, adding more of this input while keeping the other constant leads to less than proportionate increases in output.

b. The Right Ridge Line: Conversely, the right ridge line shows the limit to the productivity of the other input (usually capital). Beyond this line, additional units of this input contribute less and less to total output.

3. Economic Region of Production

The area between the two ridge lines is known as the Economic Region of Production. This region represents the range of input combinations where both inputs contribute effectively to production, ensuring efficient utilization of resources.

a. Optimal Input Utilization: Within this region, the firm can achieve the most efficient production, as both inputs are being used in their most productive ranges.

b. Avoiding Inefficiencies: Operating outside this region means that one or both inputs are being used inefficiently, either due to over-utilization or under-utilization, leading to decreased returns.

4. Implications for Production Decisions

Understanding the concept of the Economic Region of Production and the unusual case of positively sloped isoquant segments is crucial for production decision-making.

a. Input Management: It guides firms in managing their input combinations to stay within the efficient production region.

b. Cost Optimization: By operating within the Economic Region of Production, firms can optimize their costs, as both inputs are used in their most productive capacities.

Conclusion

Isoquants with positively sloped segments represent an atypical production scenario where inputs are highly complementary and lack substitutability. The construction of ridge lines and the identification of the Economic Region of Production are essential for understanding the efficient utilization of inputs in the production process. Firms must aim to operate within this region to ensure optimal input utilization and cost-effective production. Understanding these concepts is vital for making informed and strategic production decisions.