Question

7.

Suppose a firm has access to two production processes with the following marginal cost curves: MC₁ = 2Q₁ and MC₂ = 3Q₂

If it wants to produce 30 units of output, how much should it produce with each process?

8.

Output for a simple production process is given by Q = 2KL, where K denotes capital and L denotes labor. The price of capital is $25 per unit and capital is fixed at 5 units in the short run. The price of labor is $5 per unit. What is the variable cost of producing 80 units of output? Explain how you calculated your answer.

Answer 1

7. Use MC1 = MC2

2Q1 = 3Q2

Q1 = 1.5Q2

And since Q1 + Q2 = 30

we have 1.5Q2 + Q2 = 30

Q2 = 30/2.5 = 12 and Q1 = 18

Hence Q1 = 18 and Q2 = 12

8. Production function is Q = 2KL, r = $25 per unit, w = $25 per unit and K = 5 units in the short run.

When Q = 80, we have 80 = 2*5*L which gives L = 80/10 = 8 units

Variable cost = wL = 25*8 = $200