Answer to Question #131114 in Microeconomics for sohrab

Question

What is the slope of an ISO-cost line equal to and why? Provide mathematical explanation

Answer 1

The slope of an ISO-cost line is equal to price of labour divided by price of capital, that is $\frac{W}{r}$

This is because the ISO-cost line represents all combinations of labor and capital that have the same cost, and hence any values of labor and capital chosen by a company must satisfy the equation.

The equation for the ISO-cost line can be depicted as follows:

$TC=wL+rK$

Where TC = Total cost, w = wage, L = labor, r = rental rate, K = capital