Question

Suppose chipotle has a perfect substitutes and production function, McDonald's has a near perfect complements production function, and Pizza Hut has a Cobb-Douglas production function. The town passes a law to increase the minimum wage in the city to $15. Which one of these firms will see a large substitution out of labor (as percent of initial labor)? Explain your answer

Answer 1

Answer)

The more number of labor would be substituted in the case of Perfect Substitutes due to the following reasons:

(i) In the perfect substitutes, the inputs are perfectly substitutable meaning that in one of an input can be eaaily substituted with another unit of input keeping the level of output same .

(ii) As the minimum wage increases, the labor woild become costlier and since the inputs are the perfect substitues, it means that the costlier input (here, labor) would be sustituted with the capital as the latter would become comparatively cheaper.

(iii) In the case of perfect substitutes, the ratio of inputs does not matter to produce the output.Even, the same output can be produced with any one input , or a combination of both depending upon tbe price of each input.

(iv) For example, a wall can be made by using labor amd machine.Either , we could use only labor or machine, or a combination of both.