Refer to the information provided in Figure 7.9 below to answer the questions that follow. Figure 7.9
-Refer to Figure 7.9. The firm's isocost line would shift from CD to CE if
A) the price of capital fell.
B) the firm's total expenditure on inputs increased.
C) the price of labor fell.
D) either the price of labor fell or the firm's total expenditure on inputs increased.

Question

Refer to the information provided in Figure 7.9 below to answer the questions that follow.  Figure 7.9
-Refer to Figure 7.9. The firm's isocost line would shift from CD to CE if
A) the price of capital fell. 
B) the firm's total expenditure on inputs increased. 
C) the price of labor fell. 
D) either the price of labor fell or the firm's total expenditure on inputs increased.

Quizplus · Accepted Answer

The isocost line shows the combinations of labor and capital that the firm can hire for a given total cost. If the price of labor falls, the firm can afford to buy more units of labor for the same total cost, so the isocost line would shift inward (to the right) from CD to CE.  If the price of capital falls, the firm can afford to buy more units of capital for the same total cost, so the isocost line would shift outward (to the right) from CD to CB. If the firm's total expenditure on inputs increases, the isocost line would shift outward (to the right) from CD to DF. However, this is not one of the options given.

Refer to the Information Provided in Figure 7