A chair manufacturer hires its assembly-line labour for $25 an hour and calculates that the rental cost of its machinery is $100 per hour. Suppose that a chair can be produced using 4 hours of labour or machinery in any combination. The firm is currently using 2 hours of labour for every two hours of machine time. (Assume that labour is on the horizontal axis and capital is on the vertical axis).

1. Therefore, the firm [ Select ] ["is", "is not"] currently minimizing its costs of production because:

• a) the ratio of MPL to the MPK is equal to the ratio of the wage to the rental cost. [ Select ] ["true", "false"]
• b) the ratio of MPL to the MPK is greater than the ratio of the wage to the rental cost. [ Select ] ["true", "false"]
• c) MRTS_LK is less than the ratio of the wage to the rental cost. [ Select ] ["true", "false"]
• d) the MPL divided by the wage is greater than the MPK divided by the rental cost. [ Select ] ["true", "false"]
• e) MRTS_LK equals the ratio of input prices. [ Select ] ["true", "false"]

2. To minimise the cost of production, the firm should use [ Select ] ["more", "less", "the same amount of"] labour and [ Select ] ["more", "less", "the same amount of"] capital.

3. Graphically illustrate your answer by drawing an isoquant, an isocost line for the current combination of labour and capital and an isocost line for the optimal combination of labour and capital.

• An isocost corresponding to the optimal combination of labour and capital
  • is [ Select ] ["a vertical line", "a horizontal line", "an upward sloping straight line", "an upward sloping curve which is not a straight line", "a downward sloping straight line", "a downward sloping curve which is not a straight line", "L-shaped"]
  • has slope [ Select ] ["-5", "-4", "-2", "-1", "-0.5", "-0.25", "-0.2", "0", "none of the above"] at the optimal combination of inputs
• An isoquant corresponding to the optimal combination of labour and capital
  • is [ Select ] ["a vertical line", "a horizontal line", "an upward sloping straight line", "an upward sloping curve which is not a straight line", "a downward sloping straight line", "a downward sloping curve which is not a straight line", "L-shaped"]
  • has slope [ Select ] ["-5", "-4", "-2", "-1", "-0.5", "-0.25", "-0.2", "0", "none of the above"] at the optimal combination of inputs