a. Graphically illustrate this situation on a graph using isoquants and isocost lines. Explain intuitively why there is such a difference between the capital input and labour input. b. The firm now wants to double output to 320 units. If capital is fixed in the short run, how much labor will the firm require? Illustrate this point on your graph and find the new cost associated with this level of labour and capital. c. Graphically illustrate how the cost-minimizing level of capital and labor will differ from your answers in a.
a. Graphically illustrate this situation on a graph using isoquants and isocost lines. Explain intuitively why there is such a difference between the capital input and labour input. b. The firm now wants to double output to 320 units. If capital is fixed in the short run, how much labor will the firm require? Illustrate this point on your graph and find the new cost associated with this level of labour and capital. c. Graphically illustrate how the cost-minimizing level of capital and labor will differ from your answers in a.
Microeconomics A Contemporary Intro
10th Edition
ISBN:9781285635101
Author:MCEACHERN
Publisher:MCEACHERN
Chapter7: Production And Cost In The Firm
Section7.A: Appendix: A Closer Look At Production And Cost
Problem 1AQ
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Transcribed Image Text:Question B1
A firm produces a good, q according to the production function q = 2K0:2 L°0.8. The cost of
a unit of labor is £5 and the cost of a unit of capital is £40.
The firm is currently producing 160 units of output and has determined that the cost-
minimizing quantities of labor and capital are 160 and 5 respectively.
a. Graphically illustrate this situation on a graph using isoquants and isocost lines.
Explain intuitively why there is such a difference between the capital input and
labour input.
b. The firm now wants to double output to 320 units. If capital is fixed in the short run,
how much labor will the firm require? Illustrate this point on your graph and find the
new cost associated with this level of labour and capital.
c. Graphically illustrate how the cost-minimizing level of capital and labor will differ
from your answers in a.
d. If the marginal rate of technical substitution is 4K/L , find the optimal level of capital
and labor required to produce the 320 units of output.
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