2. Consider a profit-maximizing firm with production function, Y-KO-SL0.5, where Y is output, K is units of capital and Lis number of workers. The firm is a price taker in the market for capital and labour with the rental rate on capital, r, and the wage paid to workers, w. The firm is the only seller in the output market, but the risk of entry of new firms means that the firm is a price taker in the output market, and sells at the equilibrium price, p, output equal to the market demand at that price (Yº).

2. Consider a profit-maximizing firm with production function, Y-KO-SL0.5, where Y is output, K is units of capital and Lis number of workers. The firm is a price taker in the market for capital and labour with the rental rate on capital, r, and the wage paid to workers, w. The firm is the only seller in the output market, but the risk of entry of new firms means that the firm is a price taker in the output market, and sells at the equilibrium price, p, output equal to the market demand at that price (Yº).

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

2. Consider a profit-maximizing firm with production function, Y-KOSL05, where Y is
output, K is units of capital and Lis number of workers. The firm is a price taker in
the market for capital and labour with the rental rate on capital, r, and the wage
paid to workers, w.
The firm is the only seller in the output market, but the risk of entry of new firms
means that the firm is a price taker in the output market, and sells at the
equilibrium price, p, output equal to the market demand at that price (Yº).
a)
Write out the firm's profit maximization problem.
b) Solve for the first order conditions.
c) Assume that a binding minimum wage, wm, is introduced (meaning that w<wm).
Explain what happens to the number of workers and number of units of capital at
the firm. You may use the first order conditions to motivate your answer, or you
may rely on a graphical representation to support your explanation.

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