A firm uses capital and labor to produce an output. The absolute value of the slope of the isocost line equals:
A)the ratio of the marginal productivities of the inputs.
B)the ratio of the output prices.
C)the ratio of the input prices.
D)the ratio of capital to labor.

Question

Quizplus · Accepted Answer

The slope of the isocost line represents the ratio of the input prices, as it shows the cost of producing a certain output level given the prices of labor and capital. Thus, choice C is the correct answer. Choice A is incorrect because the marginal productivities of the inputs are not directly related to the cost of production. Choice B is incorrect as it relates to the ratio of output prices which is not relevant for the isocost line. Choice D is incorrect as it shows the ratio of inputs, which is not related to the slope of the isocost line. The slope of the isocost line represents the rate at which the firm can trade off one input for the other while keeping its total cost constant. Therefore, the absolute value of the slope is equal to the ratio of the input prices, since the firm can use one unit of the more expensive input to replace multiple units of the cheaper input in order to maintain the same total cost.

A Firm Uses Capital and Labor to Produce an Output