Suppose that during an economic boom labour costs rise by 100% and are expected to stay at that level for a long time, while the rental cost of capital stays the same. Draw the firm’s output expansion path before and after the boom. Assume that the firm has downward sloping strictly convex isoquants. (Draw several isoquants and isocosts). Put labour on the horizontal axis.New isocosts will have slope equal to [4 times, 3 three, twice, exactly, one half, one third, one fourth] the slope of the original isocosts.The firm will hire [more, less, the same amount of ] labour and [more, less, the same amount of] capital to produce the same amount of output.Output expansion path will [shift/ tilt to the right, shift/tile to the left, stay the same] .

The expansion path depicts the lowest-cost labor and capital combinations that can be used to…

Answered: Suppose that during an economic boom…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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Suppose that during an economic boom labour costs rise by 100% and are expected to stay at that level for a long time, while the rental cost of capital stays the same. Draw the firm’s output expansion path before and after the boom. Assume that the firm has downward sloping strictly convex isoquants. (Draw several isoquants and isocosts). Put labour on the horizontal axis.

New isocosts will have slope equal to [4 times, 3 three, twice, exactly, one half, one third, one fourth] the slope of the original isocosts.
The firm will hire [more, less, the same amount of ] labour and [more, less, the same amount of] capital to produce the same amount of output.
Output expansion path will [shift/ tilt to the right, shift/tile to the left, stay the same] .

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