When the price of all inputs increase by the same percentage:
A)the firm's total cost curve will rotate upward by a higher percentage if the firm's production technology exhibits decreasing returns to scale.
B)the firm's total cost curve will rotate upward by the same percentage.
C)the firm's total cost curve will rotate upward by a higher percentage if the firm's production technology exhibits increasing returns to scale.
D)the firm's total cost curve will remain unchanged since the cost-minimizing combination of inputs is unchanged.

Question

Quizplus · Accepted Answer

When the price of all inputs increases by the same percentage, the firm's total cost curve will rotate upward by the same percentage because the cost-minimizing combination of inputs remains the same. This assumes that the firm's production technology exhibits constant returns to scale. If the production technology exhibits increasing returns to scale, the increase in input prices will have a smaller effect on total cost, and if it exhibits decreasing returns to scale, the increase in input prices will have a larger effect on total cost. But if the technology exhibits constant returns to scale, total cost will increase proportionally to the increase in input prices. When the price of all inputs increases by the same percentage, the firm's total cost curve will rotate upward by the same percentage because the cost-minimizing combination of inputs remains unchanged. This assumes that there are no changes in technology or other factors that could affect the production process.

When the Price of All Inputs Increase by the Same