Homework Answers
a. The production function is of perfect substitutes. So, either
K or L will be used depending on the relationshiop between MRTS and
w/r.
MRTS = MPL/MPK = 
w/r = 10/10 = 1
So, MRTS > w/r which means that only L will be used to minimize
the cost.
Thus, y = 5K + 10L
So, 50 = 5(0) + 10L
So, L = 50/10 = 5
Spending = wL = 10*5 = 50
Thus, firm have to spend $50.
b. Firm will break even when total revenue = total cost
So, Py = wL
So, P = wL/y = 50/50 = 1
Thus, P = 1
Thus, firm should charge $1 per unit on the ocntract.
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