Use an isoquant/isocost diagram and words to show how firms will respond to a decrease in the wage rate. Be sure to identify the short run scale effect and the long run substitution effect.© BrainMass Inc. brainmass.com October 9, 2019, 7:18 pm ad1c9bdddf
Please see attached file.
? given a wage rate W1 the firm maximizes profits at point B
o in the upper diagram, the GH isocost line (with slope W1/r) is tangent to the Qb isoquant at point B
 the firm uses Lb units of labor and Kb units of capital to produce Qb units of output
o in the lower diagram, in the long run the firm hires LB unit of labor when the wage rate is W1; point B is one point on the demand for labor
? now suppose that the wage rate decreases to W0
o the GH isocost line will rotate outwards to the line GF (the horizontal intercept COST/W0 is now located farther from the origin) and the new set of isocost lines will be with slope W0/r.
o a decrease in the wage rate also shifts firms' ...
An isoquant/isocost diagram is depicted.