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Unformatted text preview: kept the same changes in Q due to increased capital and due to decreased labor should cancel out, i.e. = + = + = L K K L Q Q Q L K . In this way we get RTS equal to L K L K-= Using the numbers given in the problem we have 2 1 40 $ 20 $ = = = K L p p L K Therefore, K L 2 = . Intuitively, since labor is cheaper than capital it is optimal to choose more labor than capital. Plug this relationship in the production function to get 4000 2 * = K K 72 . 44 2000 = K 44 . 89 2000 * 2 = L Now compute total costs 71 . 3577 * 40 $ * 20 $ + = K L TC In case labor an capital is indivisible take K=45, L=89 and TC=3580....
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- Spring '08