1. The AFL-CIO has been a steadfast proponent of increasing the minimum wage. Offer at least two reasons why they might lobby for such increases.
2. Mountain Springs Water Company produces bottled water. Internal consultants estimate the company's production function to be Q = 300L2K, where Q is the number of bottles of water produced each week, L is the hours of labor per week, and K is the number of ma- chine hours per week. Each machine can operate 100 hours a week. Labor costs $20 per hour, and each machine costs $1,000 per week.
a. Suppose the firm has 20 machines and is producing its current output using an optimal K /L ratio. How many people does Mountain Springs employ? Assume each person works 40 hours a week.
b. Recent technological advancements have caused machine prices to drop. Mountain Springs can now lease each machine for $800 a week. How will this affect the optimal K/L ratio (i.e., will the optimal K/L ratio be smaller or larger)? Show why.