Tradeoff between fiscal stimulus and inflation

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Reference no: EM1314481

A firm has the following production function: Q=E^1/4 3K^1/2

The price of output is $10, the wage rate is $4, and the rental rate for capital is $2 per unit. Assume capital is a fixed cost at 5 units.

a. Calculate the short-run profit maximizing level of labor and capital demand.

b. Calculate the long-run profit maximizing level of labor and capital demand.

c. The rental rate of capital changes to $10, show which effect is stronger, the substitution or scale.

Reference no: EM1314481

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