Question

The following graph illustrates various cost lines (aka isocost lines), where units of labor are measured along the horizontal axis, units of capital are measured along the vertical axis. Assume the wage rate is $20 per unit of labor and the rental rate is $100 per unit of capital. - Isocost Lines (ICL) Units of Capital ICL3 ICL ICL 500 1 000 1 500 Units of Labor 2 000 2 500 3 000 Figure Description: Units of labor are measured on the horizontal axis and units of capital are measured on the vertical axis. Three downward-sloping isocost lines are provided. The first isocost line, furthest from the origin, is labeled ICL1 and has a horizontal intercept of (2500,0) and a vertical intercept of (0,500). The second isocost line, shifted to the left of ICL 1, is labeled ICL2 and has a horizontal intercept of (1,500,0) and a vertical intercept of (0, 300). The third isocost line, shifted to the left of ICL2, is labeled ICL3 and has a horizontal intercept of (500,0) and a vertical intercept of (0, 100). Question: As the isocost line shifts closer to the origin (i.e. moves from ICL1 to ICL2 to ICL3), what happens to total cost?

Answer 1

(1) (D)

The closer to (further from) the origin an isocost line, the lower (higher) the total cost.

(2) (D)

The closer to (further from) the origin an isocost line, the lower (higher) the total cost.

(3) (E)

Total cost = wL + rK = 50 x 190 + 50 x 1,310 = 9,500 + 65,500 = 75,000

(4) (E)

Total cost = wL + rK = 50 x 750 + 50 x 750 = 37,500 + 37,500 = 75,000

(5) (E)

Total cost = wL + rK = 50 x 1,310 + 50 x 190 = 65,500 + 9,500 = 75,000