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In: Economics

3. A Firm has the following production function: y = L1/3K1/2 
 (a) Does this production function...

3. A Firm has the following production function: y = L1/3K1/2 


(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 firms 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?

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Expert Solution

Rahul Sunny answered 6 months ago
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