Econ 301 - Homework #4 Due on Friday July 16, 2010 1. Cost . A U.S. electronics ﬁrm is considering moving its production to a plant in Asia. Its production function is q = L 1 / 2 K 1 / 2 . In the U.S., w = 10 = r . At its Asian plant, the ﬁrm will pay a 10% lower wage and a 10% higher cost of capital: w * = 10 / 1 . 1 and r * = 1 . 1 × 10 = 11. a. What are L and K, and what is the cost of producing q = 100 units in both countries? b. What would the cost of production be in Asia if the ﬁrm had to use the same factor quantities as in the U.S.? c. Optional (5 extra points). How can you explain why some U.S. ﬁrms move their plants in the Asian countries? 2. Proﬁt Maximization for Competitive Firms . Suppose that a competitive ﬁrm has a cost function C ( q ) = 100 + 50 q-30 q 2 + 5 q 3 and the market price is p = $50. a. What is the ﬁrm ’s ﬁxed cost? b. What is the ﬁrm’s marginal cost function? c. What is the ﬁrm’s average cost function? d. What is the ﬁrm’s average variable cost function? e. Solve for the proﬁt maximizing level of output for this ﬁrm.
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