Question

3. Assume a company that uses the production factors K and L,
 i.e. the production function is q = F(K,L).
a) In the short run, K is constant while L is variable. An expression of the marginal cost is MC = ∆V C ∆q We also know that V C = wL if L is the only variable factor and the salary is w. This means that ∆V C = w∆L. From this information, one can get an expression of the relationship between the marginal cost and the marginal product of L. Reproduce the relationship and explain it.

b) During the course we have seen a figure that (with the help of isoquants and iso-cost lines) clearly describes 'the cost of the lack of flexibility', i.e. that a short-term locking of K (K fixed in the short run) can give additional costs if one wants to increase production. Render the figure and explain it.

c) ) Now we move on to the long term. A measure of 'Economies of Scale' is
 EC = ∆C/C/∆q/q = MC
AC (1) Explain this measure by discussing the three different cases where
EC = 1, EC < 1 and EC > 1, respectively.

d) Suppose the long-run cost function of a company is C = 25q : What kind of 'Economies of Scale' does this function have? Explain!