Question 1 Consider the production function:F(L,K) = L^1/3 K^1/3 . Suppose the wage rate (price per...

Question 1 Consider the production function:F(L,K) = L^1/3 K^1/3 .

Suppose the wage rate (price per unit of labour), w, is 2 and the capital rental rate (price per unit of capital), r, is 1.

(a) Does this production function exhibit increasing, decreasing or constant returns to scale? Explain.
(b) (If you would like to, you can do part (c) first and use your answer to (c) to answer this question.) Find the total cost of producing 32 units of output.
(c) Find the total cost, average cost and marginal cost of producing y units of output. Is the average cost increasing or decreasing in y? Is the marginal cost higher or lower than the average cost?

Now consider the production function
F(L,K) = L^2/3 K^1/3 .

(d) Does this production function exhibit increasing, decreasing or constant returns to scale? Explain.
(e) Find the total cost, average cost and marginal cost of producing y units of output. Is the average cost increasing or decreasing in y? Is the marginal cost higher or lower than the average cost? (You can leave your answers in indices. The expression is more important than the value.)

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Expert Solution

Rahul Sunny answered 2 years ago

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