Least-Cost Technology and Isocost Lines

Any change in the relative price of these two inputs will change the slope of the isocost lines. Looking at the positions of the three technologies in Figure 2.7, we can imagine that if the isocost line becomes sufficiently steep (with the wage rising relative to the cost of coal), B will no longer be the least-cost technology: the firm will switch to ______

Suppose that the price of coal falls to £5 while the wage remains at £10. Looking at the table in Figure 2.7, with the new prices, the A-technology allows the firm to produce 100 metres of cloth at least cost. Cheaper coal makes each method of production cheaper, but the energy-intensive technology is now cheapest. The next step is to calculate the gains to the first firm to adopt the least-cost technology (______) when the relative price of labour to coal rises

Like all its competitors, the firm is initially using the ______-technology and minimizing its costs: this is shown in Figure 2.8 by the dashed isocost line through B (with end points H and J). Once the relative prices change, the new isocost line through the B-technology is steeper and the cost of production is £50.