A firm uses two inputs, unskilled labor, L, and capital, K, to produce its product. The wage

rate for one unit of labor is £5 while units of capital cost £20.

(a) [7 marks] Graphically depict the isocost line for a £1000 expenditure by the firm on inputs. Label the intercepts. Draw a typical isoquant (for instance one that can be derived from a Cobb-Douglas production function) for an output level, Q0, to depict the optimal input levels, LandK,forQ0 andC0 =£1000.

(b) [7 marks] Suppose the government institutes a minimum wage for unskilled labor of £6 per unit. In the short run, with capital fixed at K, show graphically how much it would cost the firm to hold its output constant at Q0.

(c) [7 marks] Show the optimal factor mix the firm will use in the long run to produce Q0, given the minimum wage.

(d) [8 marks] Suppose the government introduces a tax on capital of £2 per unit used. Show the optimal factor mix the firm will use in the long run to produce Q0 with the new tax on capital.

(e) [5 marks] Suppose the government institutes a subsidy for hiring unskilled labor of £3 per unit of labor. Graphically depict the new isocost line for a £1000 expenditure by the firm on inputs.