A chair manufacturer hires its assembly-line labor for $30 an hour and calculate

Question

A chair manufacturer hires its assembly-line labor for $30 an hour and calculates that the rental cost of its machinery is S15 per hour. Suppose that a chair can be produced using 4 hours of labor or machinery in any combination. Assuming labor is on the horizontal axis and machinery is on the vertical axis, the expansion path for this firm will a. increase at a decreasing rate because we will substitute capital for labor as output expands. b. follow the 45-degree line from the origin. c. not be defined because we cannot substitute capital for labor as output expands. d. be a vertical line. e. be a horizontal line. 5.

Explanation / Answer

Labor and capital for the manufacturer are perfect substitutes. Thus, he will use the input that has a lesser cost since they both are equally efficient in producing the chair.

Since the cost of capital is less than the cost of labor, the manufacturer will employ all of capital that will ensure that he minimizes his cost.

Therefore, the expansion path of the firm will be a vertical line. The correct answer is option d. be a vertical line.

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