Use the following to answer questions :
Table 7A-1
-For Table 7A-1, if the price of labor changes to $4 and the price of land changes to $3, what is the new least-cost factor combination?
A)A
B)B
C)C
D)D

Question

Use the following to answer questions :
Table 7A-1 
-For Table 7A-1, if the price of labor changes to $4 and the price of land changes to $3, what is the new least-cost factor combination?
A)A 
B)B 
C)C 
D)D

Quizplus · Accepted Answer

To determine the least-cost factor combination, we need to find the point where the isoquant (the contour line) is tangent to the isocost line.

At the original prices of labor and land ($3 and $2 respectively), the isoquant is tangent to the isocost at point C.

If the price of labor changes to $4 and the price of land changes to $3, the slope of the new isocost line becomes -4/3 (i.e., the ratio of the prices of labor and land).

We can then find the new tangent point by drawing a line with that slope through the original point C, which intersects the next isoquant down (where output is 2 units) at point D.

Since point D is the new point of tangent, it represents the least-cost factor combination at the new prices.

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