Suppose our firm produces chartered business flights with capital (planes) and labor (pilots) in fixed proportion (i.e., one pilot for each plane). If the wage rate paid to the pilots increases relative to the rental rate of capital for the airplanes, then:
A) the optimal capital-labor ratio should increase.
B) the optimal capital-labor ratio should decrease.
C) the optimal capital-labor ratio remains the same.
D) We do not have enough information to answer this question.

Question

Quizplus · Accepted Answer

Given the fixed proportion of capital to labor (one pilot per plane), the optimal capital-labor ratio remains the same regardless of changes in the wage rate or rental rate of capital. This is because the production process requires a fixed combination of inputs, and altering the ratio would not be feasible without changing the production technology.

Suppose Our Firm Produces Chartered Business Flights with Capital (Planes)