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Suppose that a firm has a budget of $12,000, that the wage rate is $10 per hour, and that the rental rate of capital is $ 100 per hour. If the wage rate increases to $15 per hour and the rental rate of capital rises to $120 per hour, what happens to the producer budget or isocost line? What will happen to the equilibrium level of output because of this change in factor prices? What will happen to the relative usage of labor and capital because of the change in factor prices? Explain.

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Solution Summary

The equation of the isocost line is presented.

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The equation of the isocost line is: 10w + 100K = 12,000, whose slope = -w/r = -10/100 = -0.1
After the increases, ...

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