assignment5.pdf

# assignment5.pdf - 1 Suppose there are two inputs in the...

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1) Suppose there are two inputs in the production function, labor and capital, and these two inputs are perfect substitutes. The existing technology permits one machine to do the work of three workers. The firm wants to produce 100 units of output. Suppose the price of capital is \$750 per machine per week. What combination of inputs will the firm use if the weekly salary of each worker is \$300? What combination of inputs will the firm use if the weekly salary of each worker is \$225? What is the elasticity of labor demand as the wage falls from \$300 to \$225? The firm will just use machines if the weekly salary of a worker is \$300 because in order to get the same output, the company must pay more to workers than it has to pay for the machine. The firm will just use workers if the weekly salary of a worker is \$225 because in order to get the same output, now the company must pay more for the machine. The demand for labor increases from 0 to the maximum amount possible which makes the elasticity of labor demand infinite.

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• Spring '11
• sarpca
• Economics, Substitute good, a. Capital

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