Greg has developed an automobile engine that runs efficiently for up to three hours on a single russet potato. His friends have
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Question:
The question is incomplete. See the complete question below and the graph.
You are given the following data;
Cost = C = $12,000.00
w = $100.00 per unit of labor
r = $100.00 per unit of capital
These data are used to construct the isocost line (C) in the diagram to the right. Suppose the wage increases to $200.00 but that the firm chooses to keep using the same amount of labor and capital to produce 200 units of output. Given this new set of factor prices (w'=$200.00, r = $100.00), how much have costs changed if the set of input choices remains at point A? Enter a numeric response using a real number rounded to two decimal places.)
Answer:
Cost change = $6,000
Explanation:
Given Data:
Cost = C = $12,000.00
w = $100.00 per unit of labor
r = $100.00 per unit of capital
Calculating the cost incurred at point A using the equation of iso-costline C¹, we have;
C = wl + rk
where;
C = total cost
w = price of labor = $100
l = labor = 60 unit from the graph
k = capital = 60 unit from the graph
r = price of capital = $100
Substituting into the formula, we have
C = wl + rk
= 100*60 + 100*60
= 6000+6000
= $12,000
For increase in wages(w= $200, r = $100) with same amount of labor and capital, the cost incurred becomes;
C = wl + rk
= 200*60+100*60
= 12,000 + 6000
= $18,000
Therefore,
Cost change = 18000-12000
= $6,000
See the attached graph.
