Suppose that during an economic boom labour costs rise by 100% and are expected to stay at that level for a long time, while the rental cost of capital stays the same. Draw the firm’s output expansion path before and after the boom. Assume that the firm has downward sloping strictly convex isoquants. (Draw several isoquants and isocosts). Put labour on the horizontal axis.

Suppose that during an economic boom labour costs rise by 100% and are expected to stay at that level for a long time, while the rental cost of capital stays the same. Draw the firm’s output expansion path before and after the boom. Assume that the firm has downward sloping strictly convex isoquants. (Draw several isoquants and isocosts). Put labour on the horizontal axis.

Economics For Today

10th Edition

ISBN:9781337613040

Author:Tucker

Publisher:Tucker

Chapter7: Proudction Costs

Section: Chapter Questions

Problem 10SQ

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Suppose that during an economic boom labour costs rise by 100% and are expected to stay at that level for a long time, while the rental cost of capital stays the same. Draw the firm’s output expansion path before and after the boom. Assume that the firm has downward sloping strictly convex isoquants. (Draw several isoquants and isocosts). Put labour on the horizontal axis. New isocosts will have slope equal to [4 times, 3 three, twice, exactly, one half, one third, one fourth] the slope of the original isocosts. The firm will hire [more, less, the same amount of ] labour and [more, less, the same amount of] capital to produce the same amount of output. Output expansion path will [shift/ tilt to the right, shift/tile to the left, stay the same] .
Demonstrate the following scenarios with clearly and fully labeled graphs:1. Starting from an initial optimal level of employment and output with well-behaved isoquants. Draw the effect of a decline in the price of labor (horizontal axis), where the substitution effect on capital is larger than the scale effect. Clearly highlight the expansion path in this case.
For each of the following examples, draw a representative isoquant. What can you say about the marginal rate of technical substitution in each case? a) A firm finds that it can always trade two units of labor for one unit of capital and still keep output constant. b) A firm requires exactly two full-time workers to operate each piece of machinery in the factory.
A firm employs 100 workers at a wage rate of €10 per hour, and 50 units of capital at a rate of €20 per hour. The firm is currently operating at a point on its isoquant curve. At this point, the marginal product of labour is 30, and the marginal product of capital is 50. Which of the following statements is correct? A. The firm is producing its current output level at the minimum cost. B. The firm could reduce the cost of producing its current output level by employing more capital and less labour. C. The firm could reduce the cost of producing its current output level by employing more labour and less capital. D. The firm could reduce the cost of producing its current output level by employing less capital and less labour. E. Both C and D are true.
In the long - run with strictly convex isoquants . If the relative price of labor(w/r) exceeds the marginal rate of technical substitution (MP L/ MP K) What changes should happen to the input mix ? Explain your answer.
Consider the case of a firm which produces q units of a single output using two inputs, labour (L) and capital (K). Suppose the marginal rate of substitution of labour in terms of capital is given by MRS = K1/6 / L Find the value of the derivative which can be informative about the shape of the firm's isoquant at the point where L =1.42 and K =17
Consider the fictitious firm, Icelandic Investment Managers (IIM). The company hire investment managers as workers and laptop computers with artificial intelligence (AI) as capital to offer investment advice to clients. Both managers and the AI can provide advice, but they are not perfect substitutes. Draw representative isoquants for the two inputs. What assumptions are you making when you draw the isoquants? If the AI gets smarter, and as a consequence the inputs are more substitutable, what should happen to the shape of the isoquants? Both inputs are costs; managers have to be paid a wage, called “w” and the AI needs electricity, the price of which is “Pe”. This will generate an isocost line for a particular cost level C*. Please draw this, explaining carefully and fully the purpose of the axes. Now we can put these together. For a given output level of advice, A*, show what the optimal level of inputs are for IIM in a diagram. What is the economic interpretation of the intersection…
Starting from an initial optimal level of employment and output with well-behaved isoquants. Draw the effect of a decline in the price of labor (horizontal axis), where the substitution effect on capital is larger than the scale effect. Clearly highlight the expansion path in this case and label whats neccessary.
If the marginal product of labor is 25 and the marginal product of capital 10, what is the marginal rate of technical substitution of labor for capital?
When the total product curve is drawn in a figure that measures employment along the horizontal axis, it is a graph that shows Select one: a. Point where losses are minimized for a firm b. Minimum output attainable for each quantity of labor employed c. Point where profits are maximized for a firm d. Maximum output attainable for each quantity of labor employed
Answer the following questions clearly in computer-typed print with Make sure you label your graphs . Question 1: In the long-run with strictly convex isoquants. If the relative price of labor (?/?)⁄ exceeds the marginal rate of technical substitution (???/???⁄). What changes should happen to the input mix? Explain your answer.
Consider a firm that employs capital (K) and labour (L) and uses the production technology Q = 3K + 4L. Let factor prices be r = $40 for capital and w = $20 for labour. a) What is the firm’s minimization problem? b) Plot the isoquant for Q =100. What is the Marginal Rate of Technical Substitution (MRTS)? c) For any output Q, what is the optimal combination of K and L given the input prices? Hint set MRTS = r/w and solve for L) d) What is the cost function? Confirm C(Q=100) = 500 e) Given the above, what must the supply curve look like in long-run equilibrium?