Question: Question 2 (20 points): Demonstrate the following two scenarios with clearly and fully labeled graphs: Starting from an initial optimal level of employment and output

Question 2 (20 points): Demonstrate the following two scenarios with clearly and fully

labeled graphs:

  1. Starting from an initial optimal level of employment and output with well-behaved isoquants. Draw the effect of a decline in the price of labor (horizontal axis), where the substitution effect on capital is larger than the scale effect. Clearly highlight the expansion path in this case.(10 points).
  2. The change in the optimal capital-labor ration if both inputs are perfect complements in production and both their prices increase by an identical percentage. Assume the total cost before and after the change in input prices remains the same.(10 points).

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