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2. Widgets (Q) are produced using worker hours (L) and machine hours (K). At Firm A, labor and capital are xed proportion inputs where each
2. Widgets (Q) are produced using worker hours (L) and machine hours (K). At Firm A, labor and capital are xed proportion inputs where each widget is produced using exactly 4 worker hours and 2 machine hours. At Firm B, labor and capital are perfect substitute inputs, where each widget can be produced in 120 minutes by a worker or in 30 minutes by a machine. Each rm has a production quota of 100 units of output and to choose labor and capital to minimize its cost. The wage rate is $10/hour, and the rental rate on capital is $30/hour. a. What are the cost-minimizing levels of labor and capital that will enable each firm to meet its production quota? (12 points) b. Now suppose the wage rate decreases to $7/hour. Use an isoquant/isocost framework to graphically depict each rm's response to this decrease in the price of labor, assuming it will once again choose the cost-minimizing levels of labor and capital to meet its production quota. (20 points)
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