# Production theory and cost function

January 4, 2018
###### You are considering a \$500,000 investment in the fast-food industry and have narrowed your choice to either a McDonald’s or a Penn Station East Coast Subs franchise.
January 4, 2018

The produces output y combining immigrant labour M and native labour N. The wage of immigrant workers is wN = 4 and the wage of native workers is wM = 2. The price of the output is p = 100.

1. (a)  The manager of the firm discriminates against immigrants, so he always hires natives 4 times in proportion to the number of immigrants. Calculate how much profits the firm is losing due to the discriminating manager. Illustrate your answer with a diagram with Isoquants and Isocosts and provide intuition for your answer.
2. (b)  Assume now that the manager does not discriminate. The firm is the only employer in the industry. Immigrants have supply M = 5wM and native workers have labour supply N = 10wN . Find the optimal decision of the firm and calculate how many immigrants it hires.