A firm with production function q = K¹/4L¹/4 pays $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. Provide a labelled Isoquant Diagram that decomposes the input price change into substitution effect and output effect.

A firm with production function q = K¹/4L¹/4 pays $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. Provide a labelled Isoquant Diagram that decomposes the 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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