In: Economics
4. A firm has the following production function:y = L 1/3 K 1/2
.
2
(a) Does this production function exhibit increasing, decreasing,
or
constant returns to scale? Prove.
(b) Suppose in the short run, capital is fixed at K = 100.
Assuming
that the output and factor prices are p, w, and r respectively,
find
firm’s factor demand for labor. What will the effects be when
w,
r, and p increase? Explain your results intuitively.
(c) Now, suppose the government decides to impose a payroll tax
of
$t per worker employed. What will the effect be on L ∗ ? Why?
(d) Alternatively, if the government decides to impose a lum-sum
tax
of $T, what will the effect be on L ∗ ? Why?
A lump-sum tax does not have impact on the profit maximizing demand for labor.
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