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1a.) The firm’s managers decide to use 5 workers and 2 pieces of capital to produce...

1a.) The firm’s managers decide to use 5 workers and 2 pieces of capital to produce the optimal level of output for the firm. Suppose that optimal level of output is 100 units and that the rental cost of capital is $250 and the wage is $100. Show the corresponding isocost and isoquant, assuming that the isoquant is convex to the origin.

b.) Now suppose that the wage of workers doubles. Show what would happen to the isocost line and explain how the decisions of the managers would be different.

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Answer #1

The increase in wage rate shifts the isocost line inwards from labor side. Now managers have to reduce the input of labor in their production process.

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