A firm has the following production function: q = KL, where q is output, K is capital and L is labor. The price of a unit of capital is $1,000 and the price of a unit of labor is $500. The total cost includes the cost of capital and labor, as well as an additional $200 per unit of output for raw materials. The firm currently runs a single factory with 5 units of capital. Assume that capital is fixed in the short run. (a) How much does it cost to produce q units of output (in the short-run)? [The answer I expect is a particular function of q.] (b) Will the firm produce or shut down in the short run if the price of a unit of output is $300? Explain in at most one sentence.
A firm has the following production function: q = KL, where q is output, K is capital and L is labor. The price of a unit of capital is $1,000 and the price of a unit of labor is $500. The total cost includes the cost of capital and labor, as well as an additional $200 per unit of output for raw materials. The firm currently runs a single factory with 5 units of capital. Assume that capital is fixed in the short run. (a) How much does it cost to produce q units of output (in the short-run)? [The answer I expect is a particular function of q.] (b) Will the firm produce or shut down in the short run if the price of a unit of output is $300? Explain in at most one sentence.
Chapter6: Proudction Costs
Section: Chapter Questions
Problem 8SQ
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A firm has the following production function:
q = KL,
where q is output, K is capital and L is labor. The price of a unit of capital is $1,000 and the price of a unit of labor is $500. The total cost includes the cost of capital and labor, as well as an additional $200 per unit of output for raw materials. The firm currently runs a single factory with 5 units of capital. Assume that capital is fixed in the short run.
(a) How much does it cost to produce q units of output (in the short-run)? [The answer I expect is a particular function of q.]
(b) Will the firm produce or shut down in the short run if the price of a unit of output is $300? Explain in at most one sentence.
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