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In: Economics

If you have two inputs, labor and capital and you are using them at the least...

If you have two inputs, labor and capital and you are using them at the least cost combination point.  Describe what happens to the isocost line and the equilibrium least cost point when the cost of labor decreases.

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Expert Solution

Solution:

The slope of isocost line = price of labor/price of capital (price of labor is simply wage, the cost of labor)

When the cost of labor decreases, the slope of isocost line decreases, making the isocost line flatter. As the least cost combination occurs where isocost line is tangent to isoquant, which is the curve for production function, now with a flatter isocost line, new tangency would occur at a higher quantity of labor and lower quantity of capital.

New equilibrium least cost point, thus, would have a lower quantity of capital employed and a higher quantity of labor employed as the input mix.

Rahul Sunny answered 2 years ago
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