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Homework answers / question archive / Given: Let w = price of labor (L) and r = price of capital (K) and (C) is cost

Given: Let w = price of labor (L) and r = price of capital (K) and (C) is cost

Economics

Given: Let w = price of labor (L) and r = price of capital (K) and (C) is cost.

Suppose w=10; r= 5 and C=$100, referring to the isocost equation,

1. How many units would the capital be if there is no hired labor?
2. How many units would the labor be if there is no rented capital?
3. Show in a graph the isocost line.
4. Suppose the cost (C) fell to $75, what does this denote for K and L? Show the new isocost line in the same illustration in no. 3.
5. Suppose the wage increased to 20 and the rent and the cost as given remain the same, what would be the new isocost line? Show graphically.

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The answer of the following question is given below in a detailed manner as follows :

The total cost (C) = $ 100, price of labor (W)

= $ 10, price of capital (r) = $ 5 (GIVEN).

ANS.1. If there is no hired labor, the amount of capital that could be used = 100/5 = 20 units.

ANS 2. If there is no rented capital, the amount of labor that could be hired = 100/10 = 10 units

ANS. 3. The isocost line is a line that shows different combinations of capital and labor that cost the same for a company. It is shown as line KL in the figure in below attached graph as follows :

Ans.4. Let's assume the cost (C) fell to $ 75, it means that now you can only hire less capital (75/5 = 15 units) and less labor (75/10 = 7.5 units) than before. Therefore, the isocost line will shift backward or to the left to K1L1.

Ans.5) Assume that the wage will increases to 20 and the rent and the cost as indicated remain the same, that is, 5 and 100 respectively. So the quantity of labor will be 100/20 = 5 units and the quantity of capital 100/5 = 20 units. So the new isocost line will be K2L2.

please see the attached file for the complete solution.