Question: Question 3 Assume a general production function where . (a)Assume the firm wants to maximize profits.State the firm's maximization problem and take the first order

Question 3

Assume a general production function where .

(a)Assume the firm wants to maximize profits.State the firm's maximization problem and take the first order conditions.

(b)Suppose that the price of capital increases.The workers are now worried that the increase in the price of capital will cause the firm to cut back on its labor and there will be layoffs.Are the workers correct?Make sure to fully explain your answer.

Note: for part b), it is required to use comparative statics to decide the sign of L/r, and do not assume function form.

below is an example of comparative statics.

Question 3Assume a general production function where .(a)Assume the firm wants to

Use labor as example . Since not specific functional form, use comparative statics 1 pfLK OL * 10 pfKK pfKK

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