. A company uses two inputs, unskilled labour (L) and capital (K), to produce its product. The wage rate for a unit of labour is €5, while a unit of capital cost €20. a) Determine the equation and plot the isocost line for the company's expenditures on its inputs of €1,000. Label the intercepts of the isocost with both axes. Draw a typical isoquant for an output level Q0 and indicate the optimal input levels of L and K. (Do not forget to label the axes).
6. A company uses two inputs, unskilled labour (L) and capital (K), to produce its
product. The wage rate for a unit of labour is €5, while a unit of capital cost €20.
a) Determine the equation and plot the isocost line for the company's expenditures on its
inputs of €1,000. Label the intercepts of the isocost with both axes. Draw a typical isoquant
for an output level Q0 and indicate the optimal input levels of L and K. (Do not forget to
label the axes).
b) Suppose the government introduces a minimum wage for unskilled labour of €6 per unit.
Show graphically and explain shortly how much it would cost the firm in the short run,
with capital input fixed at K, to keep its output constant at Q0.
c) Show graphically and comment shortly on the optimal factor mix that the firm would use
to produce Q0 in the long run at the specified minimum wage of €6 per unit
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