Question

Production:

a. State the decision rules used for finding the optimal amount of input(s) in both short-run and long-run production” ​2 points

b. Using your own words, explain the rationale behind each stated rule as if you were explaining them to someone who has not yet completed: ​2 points

c. The Demand for Labor is the visualization of what important short-run production concept, and what would shift this demand curve to the right? ​2 points

d. Use your answer above to explain why some worker (labor) earn much more than others, and why some workers are at a risk of losing their jobs to machines (capital). ​2 points

e. Explain why a Cobb-Douglas production function such as Q = LaKb s much more realistic than production functions such as Q = aL + bK ​2 points

Answer 1

A & B)

Decision rule;

IN SHORT RUN:- In short-run capital is fixed because in a short period a firm can't make changes in the amount of capital. hence only labor is a variable factor.

Due to fixed capital, it can't be possible to minimize the cost always. it will be minimized only when the fixed amount of capital is equal to the long run. Hence, the firm uses the profit maximization tool to choose the amount of labor.

as in short-run profit is the function of only labor

IN LONG RUN:- In the long-run both the factors are variable hence they decide combinations of labor and capital such that for a given level of output cost is minimized.

C)

Demand curve can be shifted right when the price of the output is increased

D)

Some workers are at risk of loosing their jobs because of their reservation wage i.e. minimum wage at which they are willing to work

E) because, the elasticity of the substitution of cobb doughlas should be 1

As in the first form we get the elasticity of substitution = 1

and in the second form we get the same as infinite

Elasticity of substitution is derivative of MRTS w.r.t (K/L)