Question

2. Creekwood Lawn and Landscape is a small business that employs 20 minimum wage workers and 10 units of capital (in the form of mowers, spreaders, aerators, etc.) to service 10 lawns. Creekwood is currently minimizing costs at $400 per hour, as depicted in the following diagram: Capital (K) 0-10 C= $400 40 Labor (L) a. What is the minimum wage where Creekwood is located? The rental rate? b. Suppose that the city government doubles the minimum wage in a bid to attract more unskilled workers. Draw a new isocost curve corresponding to $400 that reflects this change. Can they serve their 10 customers with just $400? What must happen to their costs? e. Following protests of the wage increase by small business owners, the city government decides to compensate those owners by sending them a lump-sum subsidy. Creekwood, which was employing 20 workers, receives a check for exactly $200. Show that it is now possible for Creekwood to hire its original combination of inputs and serve its 10 customers at a cost of $400. Draw a new isocost line that reflects the effects of the subsidy. d. Upon further reflection, the combined wage increase and subsidy can potentially have a positive impact on Creekwood's costs. How is this possible and does this mean Creekwood will once again resume hiring 20 workers and 10 units of capital or will they choose some other combination of workers and capital.

Answer 1

A)Minimum wage =Total cost /total number of workers ( if no capital hired)

Minimum wage=400/40=10

Rental rate=400/20=20

B)

New Iso lost line =4oos 20 40

No, they can't serve their 10 CONSUMER with same 400$. Total cost must Increase to serve 10 consumer.

C)

Iso cost line, (200اور همه ی ما آمد orto c=4ool same New Iso cost line respresent T 622002

To serve 10 CONSUMER ,firm required 1 0 units of capital and 20 workers.

Gross cost=10*20+20*20=200+400=600

Net cost =600-subsidy=600-200=400

So yes it possible for firm to hire original combination with same cost.

D)

Combination Newese optimal en Iso lest liw Crowrepresent (-2008) & 10 20 =4ood 90 same New Iso cost line respresent TC22008

No, now the optimal combination of choice will be indifferent ,now firm will hire more capital whose marginal product per dollar is more than marginal product of per dollar of worker.

Now firm will choose another combination of inputs In which capital will be higher than 10 and workers no. Will be lower than 20.