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 longrun
costminimizing 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 constminimizing level, what is the user cost of capital?
Answer: MPK/MPL=2
àฏ
r/w=2
àฏ
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
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '11
 Storchmann
 Economics

Click to edit the document details