Suppose that the isocost line that runs from 14K to 7L corresponds to a total cost outlay of $280. Which of the following statements is true? show work
- The rental rate of capital is $20 per unit
- It will not be possible for the firm to produce output of 20 units with a total cost outlay that is less than $280.
- If capital is fixed at 2 units in the short run, the firm will need $400 in total cost outlays to produce output of 20 units
- Both (a) and (b)
- All of the above
Homework Answers
Total cost = $280 when isocost line is from 14K to 7L.
This means rental rate of capital is (280/14)= $20 per unit.
We can see in the graph that when total cost is $280 , then the optimal output level is 20 units , this means it will not be possible for the firm to produce output of 20 units with a total cost outlay that is less than $280.
If K is fixed at 2 units in the short run , then the firm will need $400 in total cost outlays to produce of 20 units. Because the isoquant touches the isocost line of $400 when K is fixed at 2 units.
Hence, option(E) i.e all of the given statement are correct.
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