FIGURE 8-4
-Refer to Figure 8-4.The firm is initially minimizing the cost of producing 1000 units of output.Suppose the factor prices then change such that the price of capital (K)falls and the price of labour (L)rises.If the firm decides to leave its output unchanged,it will now move toward the point
A)A.
B)B.
C)C.
D)D.
E)Unknown as there is insufficient information to know

Question

FIGURE 8-4
-Refer to Figure 8-4.The firm is initially minimizing the cost of producing 1000 units of output.Suppose the factor prices then change such that the price of capital (K)falls and the price of labour (L)rises.If the firm decides to leave its output unchanged,it will now move toward the point
A)A. 
B)B. 
C)C. 
D)D. 
E)Unknown as there is insufficient information to know

Quizplus · Accepted Answer

The firm will move towards point A because the fall in the price of capital makes it relatively cheaper to use capital, and the rise in the price of labor makes it relatively more expensive to use labor. As a result, the firm will substitute capital for labor, moving towards a point where the isoquant is tangent to a lower isocost line.

FIGURE 8-4 -Refer to Figure 8-4.The Firm Is Initially Minimizing the Cost