PS_1a - Industrial Organization PS #1, Suggested Answers...

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Industrial Organization PS #1, Suggested Answers (1) Assume a firm’s marginal production of capital is equal to 20.It’s marginal product of labor is equal to 10 and the user cost of capital is 5. The firm is producing at its long-run cost-minimizing level. What is the wage? Answer: 2.5 (2) A firm has a budget of $100. MP L is equal to 4, MP K is equal to 8. The cost of labor is equal to 10.At the const-minimizing level, what is the user cost of capital? Answer: MPK/MPL=2 à r/w=2 à r=20 and w=10 (3) Suppose a firm’s production function is q=10L 0.5 K 0.5 . The cost of a unit of labor is $20 and the cost of a unit of capital is $80. a. The firm is currently producing 100 units of output and has determined that the cost- minimizing quantities of labor and capital are 20 and 5, respectively. Graphically illustrate this using isoquants and isocost lines. b. The firm now wants to increase output to 140 units. If capital is fixed in the short run, how much labor will the firm require? Illustrate this graphically and find the firm’s new
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This note was uploaded on 04/05/2012 for the course ECON UA.31 taught by Professor Storchmann during the Spring '11 term at NYU.

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PS_1a - Industrial Organization PS #1, Suggested Answers...

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