Consider a firm for which production depends on two normal inputs, labor and capital, with prices w and r, respectively. Initially, the firm faces market prices of w=$5 and r=$15. Assume the firm has a cost budget of $1,500. a. Using the isoquant-isocost model, graphically show the optimal level of employment for this firm in the long run. b. Suppose the government now imposes a minimum wage of $10 for workers. Using the same graph as part a, graphically show the impact of the minimum wage on the optimal level of employment in the long run.
Consider a firm for which production depends on two normal inputs, labor and capital, with prices w and r,
respectively. Initially, the firm faces market prices of w=$5 and r=$15. Assume the firm has a cost budget of
$1,500.
a. Using the isoquant-isocost model, graphically show the optimal level of employment for this firm in the
long run.
b. Suppose the government now imposes a minimum wage of $10 for workers. Using the same graph as
part a, graphically show the impact of the minimum wage on the optimal level of employment in the
long run.
c. Refer to the initial situation described in part a. Now suppose a new innovation causes the price of
capital to fall to $10. Using a new isoquant-isocost model, graphically show how this change impacts the
optimal levels of employment and capital in the long run. Clearly identify the resulting scale and
substitution effects caused by the lower cost of capital.
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