The manager of a firm receives an engineering report claiming that an additional hour of labour would add thrice as much output as would an additional hour of capital (Think MRTS!). According to the firm's accountants, an hour of capital costs 3 times more than an hour of labour. (3 + 3 marks) [HO 2.1]

(i)

Is the firm on its expansion path? Why or why not?

(ii)

If the firm is under contractual obligations to keep its output at current levels, what long-run adjustment (if any) should the manager make in the firm's employment of labor and capital? Demonstrate using an isoquant-isocost diagram. Label the initial situation "A" and the post-adjustment situation "B."