Question: The manager of a firm receives an engineering report claiming that an additional hour of capital would add twice as much output as would an additional hour of labor. According to the firm's accountants, an hour of capital costs 3 times more than an hour of labor.
a. Is the firm on its expansion path? Why or why not?
b. Suppose the firm is under contractual obligations to keep its output at current levels. What long - run adjustment if any, should the manager make in the firm's employment of labor and capital?
c. Sketch an isoquant - isocost diagram that illustrates the situation described above. Label the initial situation A and the post adjustment B.