Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis). If the wage rate is $20 per hour and the rental cost of capital is $25 per hour, the slope of the isocost curve will be:
A) 500.
B) 25/500.
C) -4/5.
D) 25/20 or 1.25.

Question

Quizplus · Accepted Answer

The slope of the isocost curve is determined by the ratio of the prices of the inputs, which in this case is the wage rate to the rental cost of capital. The slope is -wage/rental cost = -$20/$25 = -4/5. This negative sign indicates that an increase in capital input must be offset by a decrease in labor input to keep costs constant, reflecting the trade-off between labor and capital.

Assume That a Firm Spends $500 on Two Inputs, Labor