A firm with production function q =K1/4L1/4pays $2.00 per unit for labour, $0.50per unit for capital, has fixed costs of $50 andsells output at a price of $40. The price oflabour falls to $0.50 per unit.a.Provide a labelled Isoquant Diagram thatdecomposesthe input price change intosubstitution effect and output effect.b.Prior to the reduction in the price of labour,profits are equal toc.We observe the firm using more capital eventhough capital is relatively expensive after theprice of labour falls. John says that thishappens because the substitution effect forlabour dominates the output effect. Do youAGREE or DISAGREE (Circle)dollars.

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A firm with production function q = K1/4L1/4pays $2.00 per unit for labour, $0.50 per unit for capital, has fixed costs of $50 and sells output at a price of $40. The price of labour falls to $0.50 per unit. a.Provide a labelled İsoquant Diagram that decomposesthe input price change into substitution effect and output effect.

A firm with production function q = K1/4L1/4pays $2.00 per unit for labour, $0.50 per unit for capital, has fixed costs of $50 and sells output at a price of $40. The price of labour falls to $0.50 per unit. a.Provide a labelled İsoquant Diagram that decomposesthe input price change into substitution effect and output effect.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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