Swift Ellis, Inc., manufactures running shoes. The following graph illustrates the combination of capital and labor (point A) that minimizes the firm's cost of producing 5,000 pairs of shoes. Suppose both the wage rate and the rental price of machinery doubles.

a. Draw a new isocost line to reflect this change in the wage rate and rental price of machinery.
b. Draw a new isoquant to show the combination of capital and labor that minimizes total cost, given the increase in input prices. Label this combination point B.
c. Comparing point A to point B, can we be sure that at point B the firm will be using more or less labor? More or less capital? Briefly explain.

Transcribed Image Text:

Capital (machines per week) 80 40 Q = 5,000 40 Labor 80 (workers per week)