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    Effects on the Isoquant and Isocost of a reduction in wages

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    Suppose that as the result of recent labor negotiation, wage rates are reduced by 10% in a production process employing only capital and labor. Assuming the other conditions (productivity for example) remain constant, determine what effects this decrease will have on the desired proportions of capital and labor used in producing the given level of output at minimum total cost. (An isoquant/isocost diagram may help).

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    Solution Summary

    Using graphs shows the effect on the isoquant and isocost of a reduction in wages.

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