Figure 11-13

-Refer to Figure 11-13.The lines shown in the diagram are isocost lines.If the price of labor is $50 per unit, what is the price of capital along the isocost CE?

Question

Figure 11-13
 
-Refer to Figure 11-13.The lines shown in the diagram are isocost lines.If the price of labor is $50 per unit, what is the price of capital along the isocost CE?

Quizplus · Accepted Answer

The slope of the isocost line represents the relative prices of the two inputs. The slope of CE is -8/2 = -4. This means that the price of capital is 4 times the price of labor. Since the labor price is given as $50 per unit, the capital price along CE is $50 x 4 = $200 per unit. However, this calculation only holds true if the intercept of the line with the vertical axis (representing the cost of capital when no labor is used) is 0. Since this information is not given, we cannot be certain about the absolute price of capital. Nevertheless, we can conclude that the best answer choice is C, which is the closest to $200 per unit.

Figure 11-13 -Refer to Figure 11-13.The Lines Shown in the Diagram Are