3. If the MPPL/ MPPK in the production of a good is less than w/r, why is the pr

Question

3. If the MPPL/ MPPK in the production of a good is less than w/r, why is the produce not   in producer equilibrium? Explain how, with no change in budget

size for the firm and with the given factor price ratio, output of the firm can be increased.

5. Suppose that a firm has a budget of $30,000, that the wage rate is $10 per hour, and that the rental rate is about $100 per hour. I f the wage rate increases to $15 per hour and the rental rate of capital rises to $120 per hour, what happens to the producer budget or isocost line? What will happen to the equilibrium of level output because of this change in factor prices? What will happen to the relative usage of labor and capital because of the change in factor prices? Explain.

8. In Figure 13, as one moves from S

Explanation / Answer

a. Suppose that a firm has a budget of $30,000, the wage rate is $10 per hour, and that the rental cost of capital is $100 per hour. Draw the isocost line. (5 points) K 300 250 L 2000 3000 b. If the wage rate rises to $15 per hour and the rental rate of capital rises to $120 per hour, what will happen to the isocost line? What will happen to the equilibrium level of output? What will happen to the relative usage of labor and capital because of the change in factor prices?

The new isocost line will be as above. The relative price of labor has risen from $10/$100 = 1/10 to $15/$120 = 1/8. Thus the relative usage of labor will drop and the relative usage of capital will rise

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