ECO204_2008_Test_2_solutions

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Unformatted text preview: y, labor and capital 10 ECO 204, 2008-2009, Test 2 Solutions This test is copyright material and may not be used for commercial purposes without prior permission demands are independent of prices. Formally: q = min(L, K) Isoquant corners lie on the line K = L. The optimal labor and capital also lie on the K = L line. Thus given the target output q: L = q and K = q Colgate produces 2m toothbrushes so L = K = 2. Thus, despite stable wages and falling price of capital, there will be no change in the amounts of labor and capital. From lectures and HWs, note that even though amounts of labor and capital don't change, the cost of production will fall due to lower user cost of capital. (f) (5 points) Assuming that wages and the target output of toothbrushes are constant calculate Colgate's total costs in Table 3 below. Show all calculations below. Table 3 Year C(q) 1 246,686.66 3 246,686.66 5 246,686.66 7 66,686 10 66,686 Answer: The cost of producing output is: C(q) = PL L + PK K Now: L = K = q C(q) = PL q + PK q C(q) = (PL + PK)q Now: PL = $10 and q = 2 11 ECO...
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