1.) Demonstrate in a graph that if the production technology is of the fixed proportion type (i.e., L-shaped isoquants), an increase in the wage rate will cause only a scale effect on labor demand and no substitution effect. Will there be any difference between the long-run and short-run labor demand curves?
2.) In light of the recent economic slump, suppose the U.S. federal government comes to the rescue of the airline industry by subsidizing the purchase of new capital. Thus, the price of capital paid by airline companies falls from r to r' (where r > r'). Describe and show graphically the impact of this policy on the airline industry's demand for capital and labor in the short-run and long-run.