Q.What is Iso-cost line ?

An iso-cost line represents all input combinations costing the firm the same total outlay; its slope is the ratio of factor prices (wage rate ÷ price of capital).

An iso-cost line (also called an outlay line or price line) shows the various combinations of two factors — for example, labour (L) and capital (K) — that a firm can buy for a given total cost at given prices of the two factors.

If the total outlay is C, the wage rate is w and the price of capital is r, the iso-cost line is:

C = w × L + r × K

Key features:

• It is a straight line (constant factor prices), sloping downward from left to right.
• Its slope = w / r, the ratio of the two factor prices.
• A larger outlay shifts the whole line outward (parallel); a change in a factor's price rotates the line. …