Assume that capital is measured along the vertical axis, and labor is measured along the horizontal axis. The firm has an initial isocost line called $T C _ { 1 }$. Now suppose that the price of labor trebles and the price of capital also trebles. Which statement accurately describes the movement of the isocost line from $T C _ { 1 }$ to $T C _ { 2 }$ ?
A)The slope of the isocost line becomes flatter.
B)The slope of the isocost line becomes steeper.
C)The slope of the isocost line is unchanged.
D)We cannot determine whether the slope becomes flatter or steeper.

Question

Quizplus · Accepted Answer

The slope of an isocost line is given by -w/r where w is the price of labor and r is the price of capital. Since both prices triple, the ratio w/r does not change, and thus the slope of the isocost line remains the same. Therefore, the answer is (C) The slope of the isocost line is unchanged.

Assume That Capital Is Measured Along the Vertical Axis, and Labor