CMA Foundation · Fundamentals of Business Economics and Management · Theory of Production
If the prices of both labour and capital rise by the same percentage while the firm's total outlay stays unchanged, what happens to the isocost line?
The isocost line shifts inward parallel to itself. Equal percentage rises in both input prices cut both intercepts proportionately for a fixed outlay, while the slope, equal to the price ratio, stays the same.
- AIt shifts inward parallel to itself, with unchanged slopeCorrect
- BIt shifts outward parallel to itself
- CIt becomes steeper with the same intercepts
- DIt pivots around the capital-axis intercept
Explanation
Both intercepts, outlay/w and outlay/r, fall by the same proportion, so the line moves inward. The slope w/r is unchanged because the price ratio stays the same. Hence a parallel inward shift, not a pivot or a steeper line.
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