Question: Suppose there are two inputs in the production function - labor and capital - and that these two inputs are perfect substitutes. The existing technology

Suppose there are two inputs in the production function - labor and capital - and that these two inputs are perfect substitutes. The existing technology permits one machine to do the work of four people, and each person produces 1 unit of output. The firm wants to produce 100 units of output. Suppose that the price of capital is $750 per machine per week and that the weekly salary of each worker is $300.

(a) Which combination of inputs should the firm use?

(b) Suppose that a worker's weekly salary decreases to $150. Which combination of inputs should the firm use now?

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