CMA Foundation · Fundamentals of Business Economics and Management · Theory of Production
If the prices of both labour and capital double while the firm's total outlay stays unchanged, the isocost line will:
The isocost line shifts inward in parallel with the same slope. Doubling both input prices halves the quantity of each input that the fixed outlay can buy, so both intercepts fall, but the price ratio and hence the slope remain unchanged.
- AShift outward in parallel
- BShift inward in parallel with the same slopeCorrect
- CBecome steeper
- DBecome flatter
Explanation
Both intercepts, outlay/w and outlay/r, are halved, so the line moves toward the origin. The slope w/r is unchanged because the price ratio stays the same, so the shift is parallel. An outward shift would need a rise in outlay or a fall in prices.
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