Creekwood Lawn and Landscape is a small business that employs 20 minimum wage workers and 10 units of capital (in the form of mowers, spreaders, aerators, etc.) to service 10 lawns. Creekwood is currently minimizing costs at $400 per hour, as depicted in the following diagram:

a. What is the minimum wage where Creekwood is located? The rental rate?

b. Suppose that the city government doubles the minimum wage in a bid to attract more unskilled workers. Draw a new isocost curve corresponding to ?that reflects this change. How will this impact Creekwood?s cost of serving its customers?

c. Following protests of the wage increase by small business owners, the city government decides to compensate those owners by sending them a lump-sum subsidy. Creekwood, which was employing 20 workers, receives a check for exactly $200. Show that it is now possible for Creekwood to hire its original combination of inputs and serve its 10 customers at a cost of $400. Draw a new isocost line that reflects the effects of the subsidy.

d. The combined wage increase and subsidy can potentially have zero impact on Creekwood?s costs. Does this mean Creekwood will once again resume hiring 20 workers and 10 units of capital?

Transcribed Image Text:

Capital (K) 20 10 Q = 10 C= $400 Labor (L) 20