TYPE ANSWER AND GRAPH WITH COMPUTER, DO NOT WRITE ON PAPER 1. Suppose there are

Question

TYPE ANSWER AND GRAPH WITH COMPUTER, DO NOT WRITE ON PAPER

1. Suppose there are two inputs in the production function, labor and capital, and these two inputs are perfect substitutes. The existing technology permits two machines to do the work of three workers. That is, you can produce one unit of output using either two machines or three workers. The firm wants to produce 240 units of output. Suppose the price of capital is $75 per machine per week.

A). What combination of inputs will the firm use if the weekly salary of each worker is $60?

B). Draw the firm’s constant-output labor demand function as a function of the worker’s salary, assuming that the price of capital is $75, and that the firm wishes to produce 240 units of output. Label your graph carefully. (DRAW AN ACTUAL GRAPH WITH A COMPUTER NOT HAND)

C). Draw the firm’s overall labor demand function (i.e., the labor demand function when the firm can change its level of output in response to changes in the wage). Assume that the cost of capital is $75. Label your graph carefully. (DRAW AN ACTUAL GRAPH WITH A COMPUTER NOT HAND)

Explanation / Answer

A) Both the inputs are perfect substitutes hence the firm will choose to oeprate on cheap mode.

For manufacturing one unit, machines incurs 2* 75 = $150

and for one unit,labor cst incurs 3*60 = $180

Hence the firm will not employ labors and will employ as many machines as required for production of 240 units.

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