Suppose the Machine rental rate decreases from $20 per hour to $10 per hour, while the rental rate of labor remains at $30 per hour. Show using a labeled Isoquant-isocost diagram what happens (before and after) to the minimum-cost combination for producing shoes. Does the production process become more or less capital intensive (i.e., higher or lower K-L ratio)? Will the capital intensity (K-L ratio) of production change if, in addition, now the rental rate of labor decreases to $15 per hour? 

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Given that Machine rental rate decreases from 20 per hour to 10 per hour and labour rental rate rema... View the full answer