Problem Set 1 Solution Key
1
ChapelJet is a commercial aircraft manufacturer.
The factors of pro
duction of this production process are labor and capital. If ChapelJet hires L
units of labor and rents K units of capital, it can produce up to
L
1
=
2
K
1
=
2
units
of aircraft.
Hence, the production function is
f
(
L; K
) =
L
1
=
2
K
1
=
2
.
Suppose
ChapelJet wants to minimize total expenditures on the factors of production.
However, to be able to survive in the hostile commercial aircraft market Chapel
Jet must produce at least 10 units of aircraft.
Suppose the per unit price of
labor, w, is $1 and the per unit price of capital, r, is $4.
a
Identify the exogenous and the endogenous variables in this cost mini
mization problem.
Exogenous Variables: the minimum amount of aircraft that ChapelJet has
to produce to survive, wage rate (per unit price of labor), rent rate (per unit
price of rent).
Endogenous Variables: the amount of labor (
L
), and the amount of capital
(
K
).
b
What is the objective function?
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 Fall '07
 Codrin
 Supply And Demand, cost minimization problem, Qmw

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