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…

Microeconomics A Contemporary Intro

10th Edition

ISBN:9781285635101

Author:MCEACHERN

Publisher:MCEACHERN

Chapter7: Production And Cost In The Firm

Section7.A: Appendix: A Closer Look At Production And Cost

Problem 1AQ

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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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