Description 
The narrator introduces Marge's 
quandary over how to balance labor 
and capital—dishwashing labor and 
dishwashing machines—as her 
operation expands. The narrator 
develops the isoquant as the 
combinations of labor and capital 
that produce equal output and the 
isocost as the cost constraints.  The 
narrator then shows tangential isocost 
line to each isoquant represents the 
point of optimal efficiency.  The 
narrator then connects the points of 
optimal efficiency to plot Marge’s 
expansion path.
 

Audio Transcript 

Narrator: In the long run, Marge has the ability to change all inputs to production.  

Marge: On an average day, I have 100 dishes to wash. I have my eye on a new machine that can do five times the number of dishes a worker can do by hand in the same amount of time.

Marge: But I'm not sure what to do. What’s the best combination of workers and equipment for getting the job done?  

Narrator:  Marge has to wash 1000 dishes per week.  Since she wants to maximize profit, she wants to minimize the cost of getting the dishes washed. 

Narrator: Both labor and capital can be utilized to wash dishes, but they are not perfect substitutes.  And there are many different combinations of labor and capital that enable Marge to clean the same number of dishes

Narrator: If we plot all the combinations of capital and labor that can be used to wash 1000 dishes, the curve is called an isoquant – “Iso” meaning equal, and “quant” meaning quantities. Equal quantities.

Marge: I get it!

Narrator: If we start with lots of capital and little labor, a one unit change in labor will substitute for a relatively large quantity of labor.

Narrator: Conversely, if we start with lots of labor and little capital, one additional unit of capital will substitute for a relatively large amount of labor.

Narrator: The rate at which resources can be substituted while maintaining constant output is referred to as marginal rate of technical substitution, which can be determined at any point along the curve by measuring the slope. 

Narrator: Higher levels of production require use of more labor and capital.  Thus, we have an isoquant for every level of output.  As Marge plans her expansion she predicts how many dishes she'll have and the combinations of labor and capital that can do the work.

Narrator: But for now, the isoquant line for 1000 units is her constraint, representing her current dishwashing load.

Marge: I know I can substitute machines for labor and vice versa, but what’s the right combination for me?

Narrator:  The decision is governed in part by costs.  

Narrator: Each resource has a given cost. Marge pays $10 per hour to run the dishwashing machine and $5 per hour to employ a worker to wash dishes by hand.  It takes a worker 40 hours per week to handle Marge’s current dish load. This translates to a cost of $200 per week for dishwashing labor. 

Narrator: This line represents all the combinations of workers and machines that can be purchased at $200 per week.  It is called the isocost line, meaning...

Marge: Equal cost!

Narrator: The isoquant line for 1000 dishes drops below the isocost line for $200. This tells us that Marge could be spending less each week is she used a combination of worker and machine to clean the dishes.

Narrator: An isocost line for $100 per week, however, does not even intersect her isoquant. In other words, Marge would be left with dirty dishes at the end of the week. 

Narrator: Marge’s dishwashing operation is most efficient when Marge spends $150 per week on a combination of worker and machine. This isocost line is tangent to the isoquant curve. It intersects the curve at only one point. Every other point on the isoquant curve costs more to produce.

Narrator: When Ostrich Burger, she'll have even more dishes. In other words, she’ll be operating on higher isoquant curves.

Narrator: For each isoquant curve, there is a tangential isocost line that represents minimum cost. If we connect the points of optimal efficiency, we can plot Marge’s expansion path. It represents the units of capital and labor Marge will need for dishwashing as she expands her operation. 

Marge: I sure do like the shape of things to come.

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