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Unformatted text preview: Labor Demand - II February 28, 2010 1.(a) What happens to long run demand for labor if the demand for the firm’s output increases? (b) What happens to the long run demand for labor if the price of capital increases? 2. Consider a firm for which production depends on two inputs, labor and capital, with prices w and r , respectively. Initially the firm faces 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? 3. A firm’s production function for a good is given by Q = 25 KE , where Q is the amount of output produced, K is the amount of equipment used, and E is the hours of labor. Workers are paid $8 per hour, and the equipment rents for $8 per hour. (a) Determine the cost minimizing capital-labor ratio at this firm. (b) How much does it cost to produce 10 , 000 units of the good? (c) Suppose the rental rate of the equipment decreases to $6 per hour. What is the new cost minimizing capital-labor ratio? 4. Consider a firm whose technology is given by the production function f ( E,K ) = 4 √ EK ....
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