Understanding the Expansion Path

The expansion path of a firm illustrates how the optimal combination of inputs changes as the firm expands its output level. It's derived by connecting the points of cost minimization for each output level.

Statement I: Least Cost Combination

The expansion path is constructed by joining the points where the firm achieves the lowest possible cost for producing each successive level of output. This occurs where the isoquant (representing output) is tangent to the isocost line (representing the budget constraint). Therefore, the expansion path shows the least cost combination for producing different levels of outputs.

This statement is true.

Statement II: Constant Input Prices

A fundamental assumption when defining and deriving a single expansion path is that the prices of the inputs (e.g., labor and capital) remain constant. If input prices change, the slope of the isocost lines changes, leading to different cost-minimizing input combinations and potentially altering the path itself.

This statement is true.

Conclusion

Since both statement I (showing least cost combinations) and statement II (assuming constant input prices) accurately describe the expansion path, both are considered true.

Thus, the correct option is that both I and II are true.