Draw isocost line

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(a) Suppose the wage (w) is $40 but the price of coal (p) is $50. Write down the isocost line equation for the cost = $100 and then rewrite it in the standard form (making R the subject of the equation). Draw this isocost line, placing L on the horizontal axis and R on the vertical axis. Clearly label your intercepts.

(b) Suppose that technological progress reduced the price of coal to $25. What is the new isocost equation for the cost of $100? Write your equation in the standard form, making R the subject of the equation. Draw the isocost lines from parts (a) and (b) on the same diagram, placing L on the horizontal axis and R on the vertical axis. Clearly label your intercepts.

(c) Write down relative prices for the isocost lines from parts (a) and (b). Using your diagram from part (b) explain how the change in relative prices affects the isocost line.

Reference no: EM133065031

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