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ECO204_2008_Test_2_solutions

# Formally q minl k isoquant corners lie on the

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Unformatted text preview: 204, 2008-2009, Test 2 Solutions This test is copyright material and may not be used for commercial purposes without prior permission C(q) = (10 + PK)2 Now, PK changes over time. It was \$123,333.33 for years 1 through 5 and \$33,333 for years 6 through 12. Thus: For years 1 through 5: C(q) = (10 + PK)2 = (10 + 123,333.33)2 = \$246,686.66 For years 6 through 15: C(q) = (10 + PK)2 = (10 + 33,333)2 = \$66,686 Note: Credit will be given for correct cost calculations (i.e. provided you got C(q) = (PL + PK)q right) even if the price of capital was incorrect. 12 ECO 204, 2008-2009, Test 2 Solutions This test is copyright material and may not be used for commercial purposes without prior permission Question 6 (10 points) ETorre Enterprises used labor (L) and capital (K) to produce its target output q = 80 according to the production function q = L + K where = 2 and = 8. ETorre procures labor and leases capital in competitive markets. Currently, PL = \$100 and PK = \$10. (a) (5 points) If ETorre is in the long run, how much labor and capital does it use? Show your calculations below. Answer: ETorre has a perfect substitute's produ...
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