Assume That Capital Is Measured Along the Vertical Axis, and Labor

question 42

Multiple Choice

Assume that capital is measured along the vertical axis, and labor is measured along the horizontal axis. The firm has an initial isocost line called $T C _ { 1 }$ . Now suppose that the price of labor doubles, and the price of capital falls by one-half. Which statement accurately describes the movement of the isocost line from $T C _ { 1 }$ to $T C _ { 2 }$ ?

• A) The slope of the isocost line becomes flatter.
• B) The slope of the isocost line becomes steeper.
• C) The slope of the isocost line is unchanged.
• D) We cannot determine whether the slope becomes flatter or steeper.

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Definitions:

Selling Price

The amount a customer pays to purchase a product or service.

Fixed Costs

Fixed costs are business expenses that remain constant regardless of the level of production or sales, such as rent, salaries, and insurance premiums.

Total Fixed Costs

Expenses that do not change with the level of production or sales over a short period, including rent, insurance, and salaries.

Activity Level

In cost accounting, this refers to the volume of production or operations, impacting variable costs and potentially influencing budgeting and performance measures.