Question

6) (4 points)The Longheel Press produces memo pads in its local shop. The company can rent its equipment and hire workers at competitive rates. Equipment needed for this operation can be rented at $54 per hour, and labor can be hired at $12 per worker hour. The company has allocated $96,000 for the initial run of memo pads. The production function can be expressed as:

            Q = 0.25K^0.25L^0.75,               

where Q represents memo pads (boxes per hour), K denotes capital input (units per hour), and L denotes labor input (units of worker time per hour). The marginal products of labor and capital are as follows:

            MPL = (0.75)(Q/L)

            MPK = (0.25)(Q/K)

a.         Construct the isocost equation.

b.         Using cost minimization determine the appropriate input mix to get the greatest output for an expense of $96,000 for a production run of memo pads. Also, compute the level of output. ( Hint use the following condition MRTS = W/R or W/R =MPL/MPK )

c.         Explain what would happen in the short run (keeping capital fixed) to the appropriate input mix if wage rate increased to $15 units per hour. Would the input combination be different in the long-run? If so, how would it change? Explain.

Answer 1