Question

Suppose that a firm has an L-shaped (Leontieff or min) production function and it uses 50 workers (L=50) and 30 machines (K=30) to produce the desired amount of output. If the price of capital drops, the firm will increase the number of machines and decrease the amount of labor in order to maximize profits. Select one: True False

Answer 1

False.

Because when the production function is L - shaped. This states that both the factors of production which is capital and labour are complementary to each other and are always used in the fixed proportion that is 50 units of labour and 30 units of capital.

Now, when the prices of capital drops then quantity of capital will increases along with the increase in the quantity of labour. Because both are complementary goods to each other. The producer can't decrease amount of labour in order to maximize profit.