Describe the impact of fiscal stimulus on aggregate demand, tradeoff between fiscal stimulus and inflation.
A factory uses two inputs in the production function, labor and capital, and these two inputs are perfect substitutes. The existing technology permits 7 machines to do the work of 2 workers. The firm wants to produce 25 units of output. Suppose wages are $25. Price of output is $100. Assume capital is not a fixed cost.
a. The rental rate of capital is $10; find the profit-maximizing quantities of capital and labor will the firm use.
b. The rental rate of capital is $5; find the profit-maximizing quantities of capital and labor will the firm use.
c. What is the elasticity of capital demand as the rental rate falls from $10 to $5?