Question

If total expenditure of firm is Rs. 1000 i). Price of labour (PL)is Rs 200. ii). |Price of capital (PK) is Rs. 100, then determine the budget line for the firm? (

Answer 1

`L + 2K = 200`

Explanation:

Given

`E=1000` --- Expenditure

`L=200` --- Labor

`K = 100` --- Capital

Required

Determine the budget line

First, we calculate the units of labor

`U_1 = (E)/(L)`

`U_1 = (1000)/(200)`

`U_1 = 5`

Next, the units of capital

`U_2 = (E)/(K)`

`U_2 = (1000)/(100)`

`U_2 = 10`

The budget line equation is:

`U_1 * L + U_2 * K = E`

At this point, we take L and K as variables.

So, the equation becomes

`5* L + 10* K = 1000`

`5 L + 10K = 1000`

Divide through by 5

`L + 2K = 200` -- Budget line equation