Consider the fictitious firm, Icelandic Investment Managers (IIM). The company hire investment managers as workers and laptop computers with artificial intelligence (AI) as capital to offer investment advice to clients. Both managers and the AI can provide advice, but they are not perfect substitutes. Draw representative isoquants for the two inputs. What assumptions are you making when you draw the isoquants? If the AI gets smarter, and as a consequence the inputs are more substitutable, what should happen to the shape of the isoquants? Both inputs are costs; managers have to be paid a wage, called “w” and the AI needs electricity, the price of which is “Pe”. This will generate an isocost line for a particular cost level C*. Please draw this, explaining carefully and fully the purpose of the axes. Now we can put these together. For a given output level of advice, A*, show what the optimal level of inputs are for IIM in a diagram. What is the economic interpretation of the intersection between the isocost and isoquant lines? also illustrate diagrammatically, in two separate diagrams, how IIM’s cost-minimising input combination changes as a result of: An increase in the wages paid to the managers A decrease in the price of electricity used to operate the AI Hint: What you are being asked to do is not dissimilar to determining the consumer’s optimal choice when the prices of the goods change in the context of consumer theory. please make sure to draw the diagram(s) with care (by labelling the axes appropriately) and fully explain your reasoning.
Consider the fictitious firm, Icelandic Investment Managers (IIM). The company hire investment managers as workers and laptop computers with artificial intelligence (
Draw representative isoquants for the two inputs. What assumptions are you making when you draw the isoquants?
If the AI gets smarter, and as a consequence the inputs are more substitutable, what should happen to the shape of the isoquants?
Both inputs are costs; managers have to be paid a wage, called “w” and the AI needs electricity, the price of which is “Pe”. This will generate an isocost line for a particular cost level C*. Please draw this, explaining carefully and fully the purpose of the axes.
Now we can put these together. For a given output level of advice, A*, show what the optimal level of inputs are for IIM in a diagram. What is the economic interpretation of the intersection between the isocost and isoquant lines?
also illustrate diagrammatically, in two separate diagrams, how IIM’s cost-minimising input combination changes as a result of:
- An increase in the wages paid to the managers
- A decrease in the price of electricity used to operate the AI
Hint: What you are being asked to do is not dissimilar to determining the consumer’s optimal choice when the prices of the goods change in the context of consumer theory.
please make sure to draw the diagram(s) with care (by labelling the axes appropriately) and fully explain your reasoning.
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