Question

# Billy Joe's Backyard Bonanza produces ultra light airplane kits. From experience Billy knows that each kit

requires capital and labor to be used in the ratio of one unit capital to two units of labor. The production function follows:

Q = min( L/2 , K)

(a) Determine the returns to scale of this production function.

(b) What does your answer in part (a) suggest about the shape of this firm's long-run average cost curve?

(c) Assume that capital costs $2000 per unit and labor costs $1000 per unit. Use your answer from part (b) to find the long-run average cost and long-run marginal cost functions.

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