Suppose that after the wage decrease, the new profit-maximizing level of production increases from Q* = 2 to Q** = 4. Draw the new profit-maximizing isoquant on the same graph and label it “Q**=4.” Illustrate the scale effect graphically. Next, find the new profit-maximizing choice of labor, L*, which will incorporate both the substitution effect and the scale effect. What is the new profit-maximizing choice of capital, K*, which also incorporates both the substitution and scale effects?
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