A U.S. electronics firm is considering moving its production to a plant in Mexico. Its estimated...

A U.S. electronics firm is considering moving its production to a plant in Mexico. Its estimated production function is q = L⁰^.⁵K⁰^.⁵. In the U.S., the wage, w is ten dollars, and the cost of capital, r is also ten dollars. In Mexico, the wages is half that in the U.S., but the firm faces the same cost of capital: w^∗ = 5 and r = r^∗ = 10. If the firm wants to produce q = 100 units of output, what amount of labor and capital will it choose to utilize in the U.S.? What amount of labor and capital will it choose to utilize in Mexico? What are the total costs of producing at each plant? (Hint: With q = L⁰^.⁵K⁰^.⁵, M P_L = 0.5L⁻⁰^.⁵K⁰^.⁵ and M P_K = 0.5L⁰^.⁵K⁻⁰^.⁵.)

Expert Solution

Rahul Sunny answered 3 months ago

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