Question

In: Economics

4. A firm has the following production function:y = L 1/3 K 1/2 . 2 (a)...

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?

Solutions

Expert Solution

A lump-sum tax does not have impact on the profit maximizing demand for labor.

**if you liked the answer, then please upvote. Would be motivating for me. Thanks

Rahul Sunny answered 8 months ago
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