Refer to the following figure.The price of capital is $50 per unit: Which of the following combinations of capital and labor lies on the expansion path?
A)110K,120L
B)60K,120L
C)130K,200L
D)130K,175L

Question

Refer to the following figure.The price of capital is $50 per unit:  Which of the following combinations of capital and labor lies on the expansion path?
A)110K,120L 
B)60K,120L 
C)130K,200L 
D)130K,175L

Quizplus · Accepted Answer

To find the expansion path, we need to look for the combination of capital and labor that gives the same level of output at different prices of capital. Starting from point A, we can see that increasing labor while holding capital constant would lead to higher output initially, but as we move along the curve, the marginal product of labor diminishes and the increase in labor would result in smaller and smaller increments of output. To balance this trade-off, the firm would need to increase the amount of capital used in production, as it becomes relatively cheaper with the given price (i.e. the slope of the isoquant becomes flatter). This would result in a movement along the expansion path. 
Among the given choices, only point D lies on this path. Points A, B, and C all lie on different isoquants and do not correspond to the same level of output as point D.

Refer to the Following Figure