In: Economics
q(L,K)=L+2K=100
w=30
v=40
find, graph, and explain cost-minimizing solution (L*,K*)
Ans. Q = L + 2K
Marginal product of L, MPL = dQ/dL = 1
Marginal product of K, MPK = dQ/dK = 2
=> Marginal Rate of Substitution, MRS = MPL/MPK = 1/2
At cost minimizing output level,
MRS = w/v
But here,
MRS (=1/2) < w/v (=3/4)
So, only K will be used and no L.
Thus, for production of 100 units,
100 = 0 + 2K
=> K = 50 units
Thus, K* = 50 units and L* = 0 units
So, Minimum Cost = wL* + vK* = 30*0 + 40*50 = $2000
Thus, minimum cost is $2000.