To produce an airline flight, capital and labor are used in fixed proportions. It takes two pilots and one plane to produce a one safe trip. Daily rent of airplane is $50,000 and daily price of a pilot is $1,000.
a) Describe the isoquant map for the production of air trips.
b) Write down a production function of an airline company that produces safe air trips.
c) Suppose an airline company would like to provide 2 trips a thus rented 2 planes and hired 6 pilots. Explain both graphically and in words why this would be a foolish thing to do.
d) On the graph you drew for part (a), show how many planes and pilots airline company hires that minimize the cost of producing 2 trips, and draw the isocost line through the optimal input combination.
e) Repeat the part d) if the daily rent of an airplane is $60,000, while the price of a pilot stays at $1,000.
Suppose technical progress in avionic equipment made it possible for a single pilot to handle a plane safely.
f) How would this shift the isoquant map described in part a)?
g) How would this affect the average productivity of labor in this industry?
h) How would this affect the average productivity of capital (planes) in this industry?
i) Show graphically how the labor productivity increases when
I. firm experiences "technical progress";
II. firm primarily substitutes of capital for labor.