W14 MIC Problem Set 5 Solutions

W14 MIC Problem Set 5 Solutions

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: pital) # 4& and w = 1 (for labor). On an optimal choice diagram with K on the horizontal axis and L on the vertical axis, show the optimal choices of K and L when Q = 5. Draw the isoquant for Q = 5, indicate the optimal basket or baskets of inputs, and calculate the total cost. ! L$ b) Consider further the production function Q = min " K , % . Assuming w = 1 and r = 8, what # 4& is the long run total cost function C(Q) for this firm? [Hint: This one is easier than it looks!] Labor,!L Answer: 3) a) The isoquant Q = 5 is shown for this Leontief technology. To produce Q = 5, the firm will need at least K = 5 and L = 20. This will cost the firm C = wL + rK = 1(20) + 8(5) = 60. The isocost line representing an expenditure of 60 is drawn. The optimal basket of inputs is A. How$to$produce$5$units$of$ output$using$capital$($8$per$ unit)$and$labor$($1$per$unit) !100 !8 0 60 40 A !20 Q$=$5$IsoQuant TC$=$$60$IsoCost$ has$slope$of$–r/w$=$E8/1 !!!0 !!!0 !5 10 15 !2 0 !25 Capital,!K b) This is a Leontief function, so the firm will always use L = 4Q and K = Q, which is found at the elbow of the L-shaped...
View Full Document

This homework help was uploaded on 03/03/2014 for the course ECON 310 taught by Professor Whinston during the Spring '12 term at Northwestern.

Ask a homework question - tutors are online