Wednesday, August 5, 2015

What is Expansion Path

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Expansion Path:
The locus of optimum input combinations for different  level of cost is called the expansion path. Two inputs are typically capital & labour plotted on the axes. A producer employs both the input in proportion that is economically most efficient.
Expansion path is determined by the points of tangency between the isocost & isoquant. In other words, factor price ratio must be equal to MRTS. i.e.
r1/r2 = MP1/MP2 = f1/f2
Fig-1: Expansion path for homogeneous production function
Fig-2: for non-homogeneous production function

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