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The production process of the firm you manage uses labor and capital services. How does the...

The production process of the firm you manage uses labor and capital services. How does the long-run expansion path change when the wage increases while the rental value of capital stays constant?

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Answer #1

The expansion path is a curve depicting quantities of labour and capital that are used in the production process.

An equi-proportional increase in the price of both labour and capital does not shift the expansion path.

If the price of labour increases and that of capital remains the same, the isocost curve pivots inwards, making the expansion path pivot away from the labour axis and towards the capital axis. In other words, the firm uses more capital with an increase in output as the price of labour (wages) increase.

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