A farm in the developing country of Dessica produces 10000 bushels of millet per year, using 20 units of capital and 40 local workers. The price of millet is .32. The wage is $250 per worker; the cost of capital is $1000 per unit. At current levels of capital and employment, the marginal product of capital is 40 and the marginal product of employment is 10.
a) Is this firm employing K and E at levels that minimizing its costs in the long run? Is it maximizing its profits in the long run?
b) The worker in Dessica have been very sickly due to disease and malnourishment. Recently, improvements in sanitation and food distribution have improved the health and productivity of local workers, increasing the marginal product of employment to 44. What will be the substitution effects of this change in labor productivity, on employment and capital? Explain using the conditions for cost minimization, assuming the wage does not change because of the productivity improvement.
c)What will be the scale effects of the increasing in labor productivity, on each factor?
d) Can you predict the direction of the total effect on E,K?
Running Head: LABOR AND CAPITAL SUBSTITUTION Labor and Capital SubstitutionStudent’s NameUniversity of Affiliation 1 LABOR AND CAPITAL SUBSTITUTIONQUESTIONa) Firm Employment on Capital and…
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