5. Consider a firm that uses both labor and capital in production. The price of capital is $20 per unit and the wage rate is $10 per hour. a. Draw the firm's isocost line assuming a total production cost of $100. How steep is this line (that is, what is its slope)? Be sure to clearly label the axes. b. Suppose the wage increases to $15 per unit. In which direction does the substitution effect change the firm's demand for labor and capital? In which direction does the scale effect change the firm's demand for labor and capital? c. If the firm chooses its labor and capital combination to minimize its production costs, will the marginal product of labor be higher than, lower than, or equal to the marginal product of capital? Why? (Assume that the price of labor and capital are those given in part b.)

5. Consider a firm that uses both labor and capital in production. The price of capital is $20 per unit and the wage rate is $10 per hour. a. Draw the firm's isocost line assuming a total production cost of $100. How steep is this line (that is, what is its slope)? Be sure to clearly label the axes. b. Suppose the wage increases to $15 per unit. In which direction does the substitution effect change the firm's demand for labor and capital? In which direction does the scale effect change the firm's demand for labor and capital? c. If the firm chooses its labor and capital combination to minimize its production costs, will the marginal product of labor be higher than, lower than, or equal to the marginal product of capital? Why? (Assume that the price of labor and capital are those given in part b.)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Isocost and Isoprofit Curve Analysis

An isocost curve in the production theory that is a crucial part of economics depicts different combinations of factor inputs at a given market cost. In other words, this shows all the combinations of production factors that cost the same for the firm to employ. Usually, this can be depicted as a downward sloping straight line when the firms act as the price-takers in the factor markets. The slope of this mainly depicts the relative prices of different production factors.

Question

5. Consider a firm that uses both labor and capital in production. The price of capital is $20
per unit and the wage rate is $10 per hour.
a. Draw the firm's isocost line assuming a total production cost of $100. How steep
is this line (that is, what is its slope)? Be sure to clearly label the axes.
b. Suppose the wage increases to $15 per unit. In which direction does the substitution
effect change the firm's demand for labor and capital? In which direction does the
scale effect change the firm's demand for labor and capital?
c. If the firm chooses its labor and capital combination to minimize its production
costs, will the marginal product of labor be higher than, lower than, or equal to the
marginal product of capital? Why? (Assume that the price of labor and capital are
those given in part b.)

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