151ps2 - Economics 151a Spring 2008 Homework 2 4-1 Suppose there are two inputs in the production function labor and capital and these two inputs

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Economics 151a Spring 2008 Homework 2 4-1. Suppose there are two inputs in the production function, labor and capital, and these two inputs are perfect substitutes. The existing technology permits 1 machine to do the work of 3 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? 4-4. Consider a firm for which production depends on two normal inputs, labor and capital, with prices w and r , respectively. Initially the firm faces market prices of w = 6 and r = 4. These prices then shift to w = 4 and r = 2. (a) In which direction will the substitution effect change the firm’s employment and capital stock? (b) In which direction will the scale effect change the firm’s employment and capital stock? (c) Can we say conclusively whether the firm will use more or less labor? More or less capital?
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This note was uploaded on 10/15/2009 for the course ECON 151A taught by Professor Miller during the Spring '06 term at UC Davis.

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151ps2 - Economics 151a Spring 2008 Homework 2 4-1 Suppose there are two inputs in the production function labor and capital and these two inputs

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