Suppose the wage rate is $20 and the price of each unit of capital is $20. The price of output (p) is constant at $60 per unit. The production function is f(E,K) = E(2/3) K(1/3) where E is the level of employment and K is the level of capital. Report answers in three decimal places. a) If the current capital stock is fixed at 100 units, how much labour should the firm employ in the short run? b) Suppose the wage decreases from $20 to $12. How much labour should the firm employ in the short run? c) Calculate the elasticity of short-run labour demand curve when the wage decreases from $20 to $12. d) Calculate the long-run capital-labour ratios (K/E) when wage is $20 and when wage is $12. e) What is the elasticity of substitution as the wage falls from $20 to $12? f) When the wage falls from $20 to $12, how does the substitution effect change the firm's employment and capital stock? How does the scale effect change the firm's employment and capital stock? Can we say conclusively that the firm will use more labour or less labour? Can we say conclusively that the firm will use more capital or less capital?
Suppose the wage rate is $20 and the price of each unit of capital is $20. The price of output (p) is constant at $60 per unit. The production function is f(E,K) = E(2/3) K(1/3) where E is the level of employment and K is the level of capital. Report answers in three decimal places. a) If the current capital stock is fixed at 100 units, how much labour should the firm employ in the short run? b) Suppose the wage decreases from $20 to $12. How much labour should the firm employ in the short run? c) Calculate the elasticity of short-run labour demand curve when the wage decreases from $20 to $12. d) Calculate the long-run capital-labour ratios (K/E) when wage is $20 and when wage is $12. e) What is the elasticity of substitution as the wage falls from $20 to $12? f) When the wage falls from $20 to $12, how does the substitution effect change the firm's employment and capital stock? How does the scale effect change the firm's employment and capital stock? Can we say conclusively that the firm will use more labour or less labour? Can we say conclusively that the firm will use more capital or less capital?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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just d,e and f
Transcribed Image Text:Suppose the wage rate is $20 and the price of each unit of capital is $20. The price of output
(p) is constant at $60 per unit. The production function is
f(E,K) = E(2/3) K(1/3)
where E is the level of employment and K is the level of capital. Report answers in three
decimal places.
a) If the current capital stock is fixed at 100 units, how much labour should the firm employ
in the short run?
b) Suppose the wage decreases from $20 to $12. How much labour should the firm employ
in the short run?
c) Calculate the elasticity of short-run labour demand curve when the wage decreases from
$20 to $12.
d) Calculate the long-run capital-labour ratios (K/E) when wage is $20 and when wage is $12.
e) What is the elasticity of substitution as the wage falls from $20 to $12?
f) When the wage falls from $20 to $12, how does the substitution effect change the firm's
employment and capital stock? How does the scale effect change the firm's employment
and capital stock? Can we say conclusively that the firm will use more labour or less labour?
Can we say conclusively that the firm will use more capital or less capital?
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