Unformatted text preview: x You can trade one unit of labor for one unit of capital at a one-to-one ratio, so the relative wage is: labor of unit kapital of unit 1 kapital of $0.53/unit labor of $0.53/unit r w x The relative wage gives us the slope of the isocost line. Isocost line shows all possible quantities of labor and kapital which yield the same total cost. The optimal employment levels of kapital and labor are given by at the point where the isoquant is tangent to (just touches) the isoquant. Note that the isocost line looks just like a budget constraint. Note that the isoquant curve looks just like an indifference curve. L K 20 10 Page 91...
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- Fall '10
- Microeconomics, Marginal rate of substitution, $0.53, 0.76 K