CMA Foundation · Fundamentals of Business Economics and Management · Theory of Production
A Coimbatore pump maker has a budget of Rs 12,000. Labour costs Rs 300 per unit and capital costs Rs 600 per unit. If the firm spends the whole budget on capital alone, how many units of capital can it hire, and what is the slope (absolute value) of its isocost line with labour on the horizontal axis?
The firm can hire 20 units of capital (12,000 divided by 600), and the isocost slope with labour on the horizontal axis is the wage-to-capital price ratio, 300/600 = 0.5. So 20 units and slope 0.5 is correct.
- A20 units of capital; slope 0.5Correct
- B40 units of capital; slope 2
- C20 units of capital; slope 2
- D40 units of capital; slope 0.5
Explanation
Capital alone: 12,000/600 = 20 units. Labour alone: 12,000/300 = 40 units. With labour on the horizontal axis, slope = 20/40 = 0.5, which equals the price ratio w/r = 300/600. Option 2 inverts the slope and also mistakes the capital figure.
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