QUESTION 1
a) Please show an optimal combination of capital and labor for a typical cobb-douglas production function using an Isocost-Isoquant diagram. (please assume Labor is along the horizontal axis).
b) Say the minimum wage was increased by $5/hr.
Show in the diagram the result of this change, by changing the Isocost-Isoquant diagram you used for
part (a). Show the new combinations of Labor and Capital.
c) How it may be possible for increases in the minimum wage to have little impact on employment
levels. Please explain IN WORDS (no diagrams) using the following concepts: a) long-run versus
short-run; b) fixed inputs; and c) increase demand/output
QUESTION 2
In recent years, the use of mobile computing devices in production processes of many types has increased tremendously. New software applications have been created to solve business and engineering problems; at the same time, production of mobile devices has become much more efficient, allowing prices to fall drastically. Suppose a production process uses two inputs: labor (L) and mobile computing devices (K).
a) Draw two isoquans, one on each of the two diagrams provided below, showing how the
development of these mobile devices changed the production options available to many firms.
b) On the same two diagrams, draw a series two isocost curves, one for each diagram, showing how
falling prices of mobile devices changed firms’ options.
c) Show how optimal employment of labor and computers has changed. There should be (clearly
labeled) an original optimal point and a new optimal point. Pay special attention to correctly graphing the changed ratio of inputs which will result in the new optimal. Also, clearly label which isoquants and which isocosts correspond to each optimal.
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