production function with perfect substitutes
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A production function has 2 inputs - labor and capital. Both are perfect substitutes. Existing technology permits 1 machine to do the work of 3 workers. The firm wants to produce 100 units of output. Suppose the price of capital is $700 per machine per week. What combination of inputs will the firm use if each worker is paid $300 per week? What combination of inputs will the firm use if each worker is paid $225 per week? What is the elasticity of labor demand as the wage falls from $300 to $225?
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The solution discusses production function with perfect substitutes.
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Because labor and capital are perfect substitutes, the firm will use the cheaper input. Because three workers would cost $900, but one machine only $700, the firm will not ...
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