Unformatted text preview: a. TC = wL + rK + mM b. K is fixed input c. MP L /MP M = w/m • A change in the relative price of inputs changes the slope of the isocost line. a. All else equal, an increase in w must decrease the cost minimizing quantity of labor and increase the cost minimizing quantity of capital with diminishing MRTS L,K . b. All else equal, an increase in r must decrease the cost minimizing quantity of capital and increase the cost minimizing quantity of labor. • Expansion path: traced by cost minimizing input combinations as Q varies • L, K are normal inputs if cost minimizing quantities of L and K rise as output rises • Input is inferior if cost minimizing quantity of input decreases as firm produces more output • Expansion path: stick everything in terms of K, L, w, r...
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- Spring '09
- Economics, Isocost Line, cost minimizing input, Kimberly Zhang