3.3 Suppose that the government subsidizes the cost of workers by paying for 25% of the wage (the rate offered by the U.S. government in the late 1970s under the New Jobs Tax Credit program). What effect will this subsidy have on the firm’s choice of labor and capital to produce a given level of output?

What happens if both capital and labor are subsidized at 25%? (Hint: See Q&A 6.2.)