Question

Given labor is on the horizontal axis and capital is on the vertical axis, as the price of labor increases, what happens to the isocost line?

1) Shifts upward
2) Shifts downward
3) Remains unchanged
4) Cannot be determined

Answer 1

As the price of labor increases, the isocost line on a graph with labor on the horizontal axis and capital on the vertical axis pivots inward, indicating that less labor can be purchased for the same cost.

Step-by-step explanation:

When the price of labor increases, and you have labor on the horizontal axis and capital on the vertical axis, the isocost line will pivot to represent higher labor costs for any given level of capital. Specifically, the isocost line will rotate inward, towards the origin, because you now get less labor for the same amount of money as before. This reflects that, at the new higher wage rates, the same budget buys fewer units of labor, showing a decrease in the affordability of labor relative to capital.