Long-Run Labor Demand and Factor Substitutability

Suppose Y=30K+10L

The firm is produce 600 units of output

1. Draw the isoquant that corresponds to that level of production where L on horizontal axis and K on the vertical axis.

2. How substitutable are L and K in the production of Y? In particular, how many units of L can be replaced by one unit of K without affecting the level of output.

3. Is this isoquant convex (bowed toward the origin) ?

4. In class, we said that isoquants are convex under our “standard assumptions.” To see which standard assumption is violated in this case, hold K fixed at some level (K is fixed at zero). Graph K as a function of L for L=0,…5.

5. By looking at your graph, determine the MPL. That is what is the change in Y is when L increases by 1 unit.

6. How does the MPL changes as L increases?