A firm has the following production function: Y=AK0.5N0.5 a. After explaining what A represents, find the labour demand of this firm if A=2 and K=25. b. Suppose that the government decides to put a tax on revenues equal 10%. Find the new labour demand. What will be the effect of this tax on the equilibrium wage, assuming all firms have this production function? Use a graph to illustrate your answer. c. Suppose that a new technology allows the firm to use half of the worker and capital to produce the same quantity (that is A is now 4!). The government is concerned that now firms will fire a massive amount of their workforce and it decides to ban the new technology. Was it a correct fear? Show what would have happened. d. What would have been the impact of the new technology on the capital desired and investment of the firm? Explain.

A firm has the following production function: Y=AK0.5N0.5 a. After explaining what A represents, find the labour demand of this firm if A=2 and K=25. b. Suppose that the government decides to put a tax on revenues equal 10%. Find the new labour demand. What will be the effect of this tax on the equilibrium wage, assuming all firms have this production function? Use a graph to illustrate your answer. c. Suppose that a new technology allows the firm to use half of the worker and capital to produce the same quantity (that is A is now 4!). The government is concerned that now firms will fire a massive amount of their workforce and it decides to ban the new technology. Was it a correct fear? Show what would have happened. d. What would have been the impact of the new technology on the capital desired and investment of the firm? Explain.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Answer with either True or False and then provide at most three sentences, which includes an explanation with empirical and/or theoretical backing to support your answer.
3. Suppose you are the new Manager of Kramerica Korporation, a firm which makes large rubber bladders for oil tankers with two inputs, capital and labor. On your first day, you discover that the marginal product of capital is 1,500, the price of capital (rent) is $100, the marginal product of labor is 500 and the price of labor (the wage rate) is $50. Based on these numbers, a. Is Kramerica employing its two inputs optimally? Explain your answer. b. What would you do as the new Manager, and why? Be specific!
Consider the Labor Economics Question. This will provide insight into the idea of the optimal number of workers and the value of the marginal product of labor. If wages in the restaurant is $16.80 per hour and the price of a Hamburger is $8.30 and the production function for the workers is: Q = 11L – 0.25L2 How many workers should Your Restaurant employ during the lunch hour to maximize profits? 1 Point (note—the value of the marginal product of labor and the marginal revenue product are the same) We maximize profits which are total revenues less total costs: