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151ps2 - Economics 151a Spring 2008 Homework 2 4-1 Suppose...

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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?
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