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Production of taxi rides (15%) GlobalTaxi runs taxi services around the globe. GlobalTaxi uses two inputs in production: capital K and labor L. Capital has a rental cost of r, while labor is paid a wage w.
Problem (a) Derive the expression for GlobalTaxi's isocost function with labor on the right-hand side, and explain what it means.
Problem (b) Explain what happens to the slope of the isocost function when the wage w increases. How will an increase in w typically affect the choice of inputs for a company that has a smoothly declining marginal rate of technical substitution? Why?
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