In an effort to stop the migration of many of the automobile manufacturing facilities from the Detroit area, Detroit's city council is considering passing a statute that would give investment tax credits to auto manufacturers. Effectively, this would reduce auto manufacturers' costs of using capital and high-tech equipment in their production processes. On the evening of the vote, local union officials voiced serious objections to this statute.

1. Outline the basis of the argument most likely used by union officials. (Hint:Consider the impact that the statute would have on auto manufacturers' capital-to-labor ratio.)
2. As a representative for one of the automakers, how would you counter the union officials' argument?
3. Suppose that as part of the restructuring plan Ford conducts an analysis of how labor and capital are used in its production process. Prior to restructuring Ford's marginal rate of technical substitution is 0.12 (in absolute value). To hire workers, suppose that Ford must pay the competitive hourly wage of $15. In the study of its production process and markets where capital is procured, suppose that Ford determines that its marginal productivity of capital is 0.6 small cars per hour at its new targeted level of output and that capital is procured in a highly competitive market. The same study indicates that the average rate at which Ford can rent capital is $5600. To minimize costs Ford should hire capital and labor until the marginal rate of technical substitution reaches what proportion? At this optimal level, what should be the productivity of labor?