Consider the following example, which follows the analytical framework of Goldin and Katz(2008).a) Suppose the economy uses just two inputs, capital (K) and labor (L). If the cost of each unit ofcapital (what we called the rental rate, r) is $10 and the cost of each unit of labor (the wage rate,w) is $20, and the economy spends $100 total in costs of production, draw the isocost curve forthe economy with capital on the y-axis.b) Based upon (a) above, depict an isoquant where, at the optimal production mix, the economy usestwice as much labor as it does capital.c) Now, on the same graph, illustrate technological change that is capital-biased. Another term forthis is "labor saving" technical change. Based upon your depiction of the technological change,identify the new optimal input mix - has it indeed been "labor saving"?d) If the capital/labor ratio does not fully adjust as you depicted in part (c), what will be theimplication for the w/r ratio? If, as is the case in the US, most capital is owned by the relativelywell off and the relatively poor rely on income from their labor, what would be the implicationfor economic inequality?

Given information There are 2 inputs: Capital and labor wage rate=$20 Rental rate of the capital=$10…

Consider the following example, which follows the analytical framework of Goldin and Katz (2008). a) Suppose the economy uses just two inputs, capital (K) and labor (L). If the cost of each unit of capital (what we called the rental rate, r) is $10 and the cost of each unit of labor (the wage rate, w) is $20, and the economy spends $100 total in costs of production, draw the isocost curve for the economy with capital on the y-axis. b) Based upon (a) above, depict an isoquant where, at the optimal production mix, the economy uses twice as much labor as it does capital.

Consider the following example, which follows the analytical framework of Goldin and Katz (2008). a) Suppose the economy uses just two inputs, capital (K) and labor (L). If the cost of each unit of capital (what we called the rental rate, r) is $10 and the cost of each unit of labor (the wage rate, w) is $20, and the economy spends $100 total in costs of production, draw the isocost curve for the economy with capital on the y-axis. b) Based upon (a) above, depict an isoquant where, at the optimal production mix, the economy uses twice as much labor as it does capital.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter9: Production Functions

Section: Chapter Questions

Problem 9.3P

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