Question

Answer e and f only please!

7) Consider a firm with the long-run technology Q-F(K, N)-KN. a) With K on the vertical axis and L on the horizontal, draw some isoquants for this firm. b) Label the Q=10 isoquant. c) For input prices w=3, r=2, draw some isocost lines for the firm. d) By equating the MRTS and the isocost line slope, fine the optimal input mix in the long run if Q=10. c) What happens to this input mix if w rises from 3 to 4, with r=2 unchanged? Assume we remain on the Q=10 isoquant (so you are studying the substitution effect along). f) If we allow the firm to alter its scale of operations, which direction will long-run Labour Demand change, relative to your answer in e, in response to the rise in w? Explain.

Answer 1

Solution @= FCK.) = KN a) 8.-10 - © : Iso Cost line tulis col + 2k=C [3l+2k =] Scanned with CamScanner

I (d) Mris is rots at which labor is Subdititude for Capital MR is - - mil Mik - dolal do lak - K Slope of Two Cost line - o - 3 By Equating we get, 1 [k: 3. l] Put k in a we get, o kl - 10=(3 IR 10-3d2 Jioxz =d [l=2.58197 K= 3. 8729 Input Mix. Scanned with CamScanner