ECO204_2008_Test_2_solutions

It was 12333333 for years 1 through 5 and 33333 for

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Unformatted text preview: ction function. Optimal labor and capital depends on whether the isocost is steeper, tangent, or flatter than the isoquant. The isocost has slope PL/PK = 100/10 = 10 The isoquant has slope = MPL/MPK = / = 2/8 = 1/4. Given the isocost is steeper than the isoquant, ETorre will use zero labor. Thus: q = L + K q = K K = q/ K = 80/8 = 10 L = 0, K = 10. Incidentally, the y and x intercepts of the isoquant are 10 and 40 respectively. 13 ECO 204, 2008-2009, Test 2 Solutions This test is copyright material and may not be used for commercial purposes without prior permission (b) (5 points) Plot your answer to part (a) in Figure 1 below. Now suppose PL decreases: graph the resulting demand curve for labor in Figure 1 below: Figure 1 Answer: To see how the demand curve was derived note from part (a) that when PL = \$100, there is no demand for labor. This implies L = 0 for PL 100. As PL falls, there will be no demand for labor so long as the isocost is steeper than the isoquant. See Figure 2 below. Figure 2 14 ECO 204, 2008-2009, Test 2 Solutions This test is copyri...
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This note was uploaded on 05/02/2011 for the course ECO 204 taught by Professor Hussein during the Fall '08 term at University of Toronto.

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