Problem
1. If the MPPL / MPPK in the production of a good is less than w/r, why is the producer not in producer equilibrium? Explain how, with no change in budget size for the firm and with the given factor price ratio, output of the firm can be increased.
2. Suppose that, from an initial producer equilibrium position, the rental rate of capital rises and the wage rate of labor falls. Can it be determined unambiguously whether the quantity of output of the firm will rise or fall as a result of this change in relative factor prices? Why or why not?