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 slope of isocost CE is
A) -1.
B) -2/3.
C) 0.
D) indeterminate from this information, as the prices of capital and labor are not given.

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 slope of isocost CE is
A) -1. 
B) -2/3. 
C) 0. 
D) indeterminate from this information, as the prices of capital and labor are not given.

Quizplus · Accepted Answer

The slope of isocost CE is equal to the ratio of the wage rate (the price of labor) to the rental rate (the price of capital), which is -2/3 (i.e. -$8/$12). The optimal choice will be the point where the isocost line is tangent to the production isoquant, which in this case is point A. At point A, the ratio of the marginal products of labor and capital is equal to the ratio of their prices (w/r = MP_L/MP_K).

Refer to the Information Provided in Figure 7