1.

A firm is using a Cobb-Douglas production function

in the creation of bottled soda. Let q = the number of cases of bottled sodas, K = the number
of machines, L = the number of workers hired, and α=1/3

(a) Suppose that the firm only has access to K = 32 machines currently. If the current market price
for a case is P = $22.50, the rental rate of capital r = $24, and wage rate is w; then, find the optimal
choice of L* the firm should hire (hint: choice will be a function of w)?

(b In the town, the labour supply is inelastic in the short-run with L˄s = 500. What would happen if
the goverment set a minimum wage of w = {$10,$15, $20} (hint: think how many would be hired
versus how many would want to work for each of the 3 wages and number may have a decimal
point)?

(c) Suppose the market wage is w = $6 based on L˄s = 500 which means the firm would produce q =
200 cases in the short-run. If the firm continues to produce q - 200 and is able to adjust K and L (with
P = $22.50, w = $6, and r = $24), how many people would be hired and how much capital would be
used (note: assume the labour supply LS will have time to adjust and is not fixed).

(d) How do the short-run profits from part (c) compare with the outcome when the firm can adjust K
and L? Use a sketch to explain why this would be the case (make sure to label your sketch).

(e) Suppose a new technology comes along allowing the firm to replace all