Sketch the isocost line representing the new minimum cost, Business Management

He works at a local coffee shop for wage of $7.50 per hour.  The job is very flexible; he can work there as many hours as he wants.

When he's not working at the coffee shop, Bill assembles and sells widgets with the help of his friend Ted, whom he pays $10 per hour. Bill's labor (LB) and Ted's labor (LT) are imperfect substitutes (Bill and Ted have somewhat different skills and their labor is somewhat complementary in the production process).  The isoquant for assembling q=10 widgets per day is shown in the graph below.  Also shown in the isocost line representing Bill's current economic cost (C1) of assembling q=10 widgets, given the wage he currently pays Ted and the implicit cost of his own labor, along with Bill's current cost-minimizing bundle of labor inputs (LB1 and LT1).

Suppose that Bill gets promoted to manager at the coffee shop and his wage goes up from $7.50 to $15.00 per hour. Show graphically and describe verbally the effect that this has on Bill's choice of labor inputs in his widget-assembly business.  Assume that Bill continues to produce 10 widgets per day, that he chooses an input bundle that minimizes the economic costs of production, and that both Bill's and Ted's hours are flexible (Bill can still divide his time between the coffee shop and widget assembly however he wants; Ted has nothing else to do and will work as many or as few hours as Bill wants him to at the wage of $10 per hour.)

In particular:

A.  Explain in words why Bill's raise at the coffee shop is relevant to his choice of inputs in his widget assembly business.

B.  Sketch the isocost line representing the new minimum cost (C2) of assembling 10 widgets (it does not need to be drawn exactly to scale).  Label the endpoints.

C.  Label the new optimal bundle of inputs on the graph.

D.  What happens to the number of hours that Bill and Ted each work at widget assembly per day?

Posted Date: 3/13/2013 3:48:49 AM | Location : United States

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