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Suppose that the cost of renting capital increases.  What happens to the profit maximizing amount of labor...

Suppose that the cost of renting capital increases.  What happens to the profit maximizing amount of labor chosen by the firm?  Show using the firm’s optimal choice of labor graph.

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Answer #1

If the price of capital rises, the slope of the line depicting the cost of labour and capital will get flatter, with labour on the x-axis and capital on the y-axis and therefore the point of tangency with the isoquant would move to a different point which would result in a higher level of labour and lower level of capital. This is shown in the diagram below.

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