If the cost of labour increases, the isocost line will (choose all correct answers):

Question

BlackTom AI · Accepted Answer

When the cost of labour changes, the isocost line, which represents all combinations of labour and capital that can be purchased with a given total cost, adjusts its position and slope accordingly.
Option a: Stay the same. This would imply that a change in the wage rate does not affect the trade-off between labour and capital at all, which is incorrect because the relative cost of labour directly affects the budget constraint and thus the slope and intercepts of the isocost line.
Option b: Shift inward in parallel fashion. A parallel inward shift would occur if the total budget (or total cost) were reduced while the relative prices remained unchanged. Here, only the price of labour changes, so the line does not move parallel inward; the slope changes as well as one intercept.
Option c: Shift outward in parallel fashion. An outward parallel shift would require an increase in the total available budget with unchanged relative prices. Since the wage rate changes but total cost remains the same for the isocost construction, a parallel outward shift is not the correct response to a higher wage.
Option d: Rotate inward around the point where only capital is employed in production. This is the correct characterization: with a higher wage, the L-intercept L = C/w falls (so the line intersects the L-axis at a lower L), while the K-intercept K = C/r stays fixed if the rental rate of capital r is unchanged. The result is a rotation of the isocost line toward the left, pivoting around the K-intercept (the point where only capital is used). This captures the change in slope and intercepts due to the increased cost of labour.
In summary, only the described rotation around the pure-capital point matches the economic effect of a higher labour cost; the other options misstate how the budget constraint responds to a change in wage.

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