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

Question

BlackTom AI · Accepted Answer

In the isocost framework, the total cost constraint is C = wL + rK, where w is the wage rate (cost of labor), r is the rental rate of capital, L is labor input, and K is capital input.

Option a: 'Rotate inward around the point where only capital is employed in production' is correct. If the cost of labor increases (w rises) while C and r stay fixed, the L intercept C/w decreases (since L = (C - rK)/w when K = 0, L = C/w). The K intercept C/r stays the same when L = 0. Therefore the isocost line pivots toward the vertical axis (K-axis) around the fixed K-intercept, effectively rotating inward rather than shifting parallelly.

Option b: 'Stay the same' is incorrect. A higher w changes the relative weight of L in the cost equation, altering the slope and the intercepts, so the line does not stay the same.

Option c: 'Shift inward in parallel fashion' is incorrect. The isocost line would rotate due to the changed w/r ratio, not merely shift inward in a parallel fashion. A parallel shift would occur if C changed while w and r remained the same, not when w changes.

Option d: 'Shift outward in parallel fashion' is incorrect for the same reason as option c. An outward parallel shift would require a change in C with w and r fixed; changing w alone does not produce a parallel outward shift.

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