ECO204_2008_Test_2_solutions

Optimal labor and capital depends on whether the

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Unformatted text preview: ght material and may not be used for commercial purposes without prior permission When the isocost becomes tangent to the isoquant, any amount of labor from 0 to 40 can be hired. This will happen when: PL/PK = / = PL = PK PL = 10 = $2.50 As PL falls further, the isocost will become flatter than the isoquant. This lets ETorre to produce his target output at a lower cost. See Figure 3. For any wage lower than $2.50, demand for labor will be 40. Figure 3 15 ECO 204, 2008-2009, Test 2 Solutions This test is copyright material and may not be used for commercial purposes without prior permission Question 7 (20 points) The following page contains Exhibits 1 and 2 from the Prestige Telephone Company case, as well as Exhibit 3 from the solution. Recall Pcommercial = $800/hr and Pintercompany = $400/hr. (Note: In the case, all contribution analysis was conducted from March 2003 onwards.) (a) (10 points) Suppose Prestige Data Services raises commercial prices to $1,200/hr. Higher commercial prices will lead to lower commercial sales....
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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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