It shows a firm currently producing at point a. It is producing 200 units of output per time period (shown by the isoquant passing through point a) and is using K1 units of capital and L1 units of labour. The cost of this much capital and labour is assumed to be $40 000 (shown by the isocost passing through point a). Let us assume that the plant the firm is using is designed to produce 200 units of output at the least possible cost. Therefore point a is on the long-run expansion path. Both short-run and long-run average costs are $40,000/200 = $200. Now let us see what will happen to the firm's costs if it chooses to expand output to 300 units in (a) the long run and (b) the short run