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    Isoquant/Isoquant effects of 20% increase in costs

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    If a firm uses two inputs, capital and labor, to produce 500 units of output. Using isoquant and isocost lines, explain what will happen to the cost minimizing input quantities when the price of capital and labor both increase around 20 percent.

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    Solution Preview

    Hi there,

    Assuming you still want to produce 500 units, the cost minimizing input quantities remain the same. The cost minimizing input ocurrs when:

    MPL/wage = MPK/r ...

    Solution Summary

    What happens to the Isoquant/Isocost graph (no graph included) when the price of labor and capital increases by 20%.