1. Suppose that a firm currently employs 50 units of capital and 800 units of labor, and has a marginal product of labor of MPL = 12 and a marginal product of capital of MPK = 15. If the wage rate is w = $25 and the user cost of capital is r = $70, clearly explain how the firm could produce more output without increasing its costs.
[Note: Iâm only looking for a qualitative answer here; the information provided is not sufficient to calculate the optimal combination of capital and labor, only to indicate the direction in which the firm should adjust its input mix.]
2. The country of Elbonia has just established a franchise tax of $2,000 per year on all companies that do business in the country (to be perfectly clear, this tax is a fixed amount per year regardless of the amount of output a firm produces). What is the effect of this tax on the marginal cost of production for firms that do business in Elbonia?
1. Suppose that a firm currently employs 50 units of capital and 800 units of labor, and has a marginal product of labor of MPL = 12 and a marginal product of capital of MPK = 15. If the wage rate is w = $25 and the user cost of capital is r = $70, clearly explain how the firm could produce more output without increasing its costs.
[Note: Iâm only looking for a qualitative answer here; the information provided is not sufficient to calculate the optimal combination of capital and labor, only to indicate the direction in which the firm should adjust its input mix.]
2. The country of Elbonia has just established a franchise tax of $2,000 per year on all companies that do business in the country (to be perfectly clear, this tax is a fixed amount per year regardless of the amount of output a firm produces). What is the effect of this tax on the marginal cost of production for firms that do business in Elbonia?
