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How does a change in the price of one input change the firm's long-run expansion path? If the price of an input changes, then the O A
How does a change in the price of one input change the firm's long-run expansion path? If the price of an input changes, then the O A. slope of the isoquants will change, and the firm will substitute away from the relatively more expensive input, pivoting the expansion path toward the axis of the relatively more expensive input. O B. isoquants will shift in a parallel fashion, and the firm will substitute toward the relatively cheaper input, pivoting the expansion path toward the axis of the relatively cheaper input. O C. isocost lines will shift in a parallel fashion, and the firm will substitute away from both inputs, shifting the expansion path in a parallel fashion. OD. slope of the isocost lines will change, and the firm will substitute toward the relatively cheaper input, pivoting the expansion path toward the axis of the relatively cheaper input. O E. slope of the isocost lines will change, and the firm will substitute away from the relatively more expensive input, pivoting the expansion path toward the axis of the relatively more expensive input.
Expert Solution
Since the goal of the firm is to minimize cost for every output level, so it chooses the combination of inputs that are on the expansion path. This combination depends on the ratio of input prices. When the price of one input changes, the price ratio also changes. Suppose the price of an input increases, then less amount of input will be purchased and the intercept of the isocost line on that input's axis moves closer to the origin. It also changes the slope of the isocost line and the price ratio which forces the firm to substitute away from the more expensive input toward the cheaper input. Now the expansion path bends toward the axis of the cheaper input.
If the price of an input changes, then the
D. slope of the isocost lines will change, and the firm will substitute toward the relatively cheaper input, pivoting the expansion path toward the axis of the relatively cheaper input.
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