In the above diagram, the red curves represent a firm\'s isoquant lines at outpu

Question

In the above diagram, the red curves represent a firm's isoquant lines at outputs of 4, 12, and 14 units per day. Three possible expansion paths, E, E?, and E?, are shown by the orange, green, and blue lines, respectively. The graph also allows you to place a line on the picture at any slope you like; you might want to use it to help you answer parts (a) and (b), since it can help you to find points of tangency. Suppose the price of labor is $12 and the price of capital is $12. Which of the three lines represents the firm's expansion path? Now suppose the price of labor is $12 and the price of capital is $36. Which of the three lines represents the firm's expansion path?

Explanation / Answer

a) E"

b) E

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