Homework 6 (Due on 1:30 pm, Wednesday, Nov 15 ) MULTIPLE CHOICE (20 points) Cagi

Question

Homework 6 (Due on 1:30 pm, Wednesday, Nov 15 ) MULTIPLE CHOICE (20 points) Cagital Long Rus ky Figure 7.4.1 to 42: 1) 1) Refer to Figure 7.4.1 above. An increase in production, from A) costs the same in the short run or in the long run B) uses more capital in the short run. C) is more costly in the short run than in the long run D) uses less inputs in the long run 2) Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis). If the wage rate is S20 per hour and the rental cost of capital is $25 per hour, the slope of the isocost curve will be: 2) A) 500. B)-4/5. C)25/20 or 1.25 D) 25/500

Explanation / Answer

Question 1

The short-run expansion path shows that, in short-run, increasing production from q1 to q2 will move the firm to isocost curve, EF.

On the other hand, the long-run expansion path shows that, in long-run, increasing production from q1 to q2 will move the firm to isocost curve, CD.

Isocost curve on the right indicates greater cost of production.

So, curve EF reflects higher cost of production than curve CD.

Thus, an increase in production from q1 to q2 is more costly in the short-run than in the long-run.

Hence, the correct answer is the option (C).

Question 2

Wage (Price) of labor = $20 per hour

Rent (Price) of capital = $25 per hour

Slope of isocost curve is the negative of the price ratio.

In other words,

Slope of isocost curve = - (Price of input taken on horizontal axis/Price of input taken on vertical axis)

Slope of isocost curve = -(PL/PK)

Slope of isocost curve = -(20/25) = -4/5

Hence, the correct answer is the option (B).

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