If labour is measured along the horizontal axis and capital is measured along the vertical axis,an increase in the wage rate will cause the isocost line to
A) Rotate to the left along the labour axis, causing the firm to use less labour and more capital
B) Rotate to the right along the labour axis, causing the firm to use less labour and more capital
C) Rotate to the left along the labour axis, causing the firm to use less capital and more labour
D) Rotate to the right along the labour axis, causing the firm to use less capital and more labour

Question

Quizplus · Accepted Answer

An increase in the wage rate makes labour more expensive relative to capital. This causes the isocost line, which represents all combinations of labour and capital that can be purchased for a given total cost, to rotate to the left along the labour axis. This rotation reflects the increased cost of labour, leading the firm to substitute labour with capital, thus using less labour and more capital.

If Labour Is Measured Along the Horizontal Axis and Capital