Answer to Question #63691 in Microeconomics for Mage

Question

Initially, a firm uses L* units of labor and K* units of capital to produce q* units of output. The firm has the usual smooth-shaped isoquants (labor and capital are imperfect
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substitutes). To encourage additional employment, the government starts paying 25% of the firm's wage payments (the rate offered by the U. S. government in the late 1970s under the New Jobs Tax Credit program).
A. If the firm continues to produce q* units, show in a graph how its choice of inputs changes. (6 pts)
B. Does the government program achieve its objective of increasing employment? (3 pts)
C. In a graph, show the firm's original output-expansion path and its new path. (6 pts)

Answer 1

Initially, a firm uses L* units of labor and K* units of capital to produce q* units of output. The firm has the usual smooth-shaped isoquants. To encourage additional employment, the government starts paying 25% of the firm's wage payments.
A. If the firm continues to produce q* units, then the use of labor increased and the use of capital decreased, so the isoquants will change its shape.
B. Yes, the government program achieved its objective of increasing employment.
C. The firm's output-expansion path will move to the right.