Question

Gutbusters, a fast food restaurant, currently pays $8 per hour for servers and $80 per hour to rent ovens and other kitchen machinery. At it current input choice, Gustbusters uses seven hours of server time per unit of machinery time. (a) What is the slope of the isocost line representing $1200 in production cost, if labor is on the horizontal axis and capital is on the vertical axis? (b) The ratio of marginal products (capital to labor) is 12. Does the current input choice represent a cost-minimizing input bundle? If not, what adjustments are called for to improve the efficiency of input use? (c) The Service Industry Employment Unification Front (SIEUF) has campaigned to raise wages for fast food restaurant workers to $15 per hour. If SIEUF is successful in this effort, how do you expect the firm to react? In particular, do you expect production cost to remain the same? What about output? Be concise—you should be able to explain what you expect and why in one complete sentence each for cost and output.

Answer 1

A) Tc=wL+rk

Tc =total cost

W =wages

L labour

R =rent

K capital

K=Tc/r-w/r

Capital =1200/80*7

Labour =1200/56

B)In equilibrium, r/w = MPK/MPL. if the firm is minimizing its costs of production, then the MRTS will equal a ratio of the prices of the inputs. The ratio of prices, r/w = 80/8 = 10, and the MRTS of capital for labor . two ratios (12and 10)are not equal, the firm should change the mix of inputs.

increase efficiency in the use of inputs, the firm use more capital and use labour less to make the ratios equal.

C) if SIEUF is successful in rising price of wages then a fast food restaurant should faceloss unless and until rise in revenue, Firm increase price of product to rise revenue otherwise firm face losses

No production cost does not remain same after increasing price of wage.

Firm increase cost to pay more to labour, output remain same