1. If we plot capital on the vertical axis and labor on the horizontal axis, the

Question

1. If we plot capital on the vertical axis and labor on the horizontal axis, the slope of a straight-line isocost line drawn on the same graph is a. PU/PK b. PK/PL 2. If, by increasing the quantity of labor used by one unit, the firm can give up two units of capital and still produce the same level of output, then the MRTS is a. b. 2 d. 4 3. If the MRTS equals .5, then the MPK/MPt is a. d. 4 4. The slope of the isocost line tells the firm how much A) capital must be increased to keep total cost constant when hiring one more unit of labor. B) capital must be reduced to keep total cost constant when hiring one more unit of labor. C) more expensive a unit of capital costs relative a unit of labor. D) the isocost curve will shift outward if the firm wishes to produce more 5. The slope of the isoquant tells the firm how much A) output increases when labor or capital increases by one unit. B) output increases when both capital and labor are increased. C) labor must decrease to keep output constant when capital increases by one unit. D) a unit of capital costs relative to the cost of labor.

Explanation / Answer

1. c) - Price of L/ Price of K

2. MRTS = MP of L/MP of K = 1/2 = 0.5

3. MRTS = MP of L /MP of K = 1/0.5 = 2

4. B) capital must be reduced to keep total cost constant when hiring one more unit of labor.

5. C) labor must decrease to keep output constant when capital increases by one unit.

To increase use of one unit firma has to reduce other factor of production.

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