Consider a company selling automatic pancake makers. The production technology uses two inputs: labor and machines .
a. Graph the short run production function for the firm selling automatic pancake makers . Assume that the number of machines is fixed in the short-run and that there are diminishing marginal returns to labor . Indicate the optimal amount of labor the firm will hire and the profit maximizing number of pancake makers produced.
b. Indicate how the isoprofit line, choice of labor and output change if the price of automatic pancake makers decreases.
c. Indicate how the isoprofit line, choice of labor and output change if the price of labor decreases. Use this result to create the firm’s factor demand curve for labor.
d. Assume the market for labor is competitive in the sense that supply is perfectly elastic. Show how supply of labor changes to affect its price and the quantity demanded by the firm.
e. Indicate how the optimal choice of labor , output and profit change if the marginal product of labor increases for all units of labor.