Refer to Figure 8-6.Suppose there is a change in relative factor prices and the cost-minimizing method of producing 2000 golf tees is now at point D.If the total cost of producing 2000 golf tees is still $60,it must be the case that
A)the price of labour fell and the price of capital remained constant.
B)the price of labour and capital both fell.
C)the price of labour rose and the price of capital fell.
D)the price of labour fell and the price of capital rose.
E)the price of labour and capital both rose.

Question

Quizplus · Accepted Answer

The cost-minimizing method has shifted from point B to point D, which means that the relative price of labour has decreased and the relative price of capital has increased. In order for the total cost to remain constant at $60, the cost savings from the cheaper labour must offset the increased cost of capital, hence the price of labour fell and the price of capital rose.