Consider a firm whose production is given by Q(K, L) = K^1/3L^1/3, where K and L...

Consider a firm whose production is given by Q(K, L) = K^1/3L^1/3, where K and L are, respectively, the quantities of capital and labour production inputs. Prices of capital and labour are both $1 per unit.

(a) Derive and interpret the firm’s demand functions for capital and labour.

(b) Derive and interpret the firm’s Long-Run Cost Function.

(c) In the long-run, if the firm wished to produce 16 units of output, what quantities of capital and labour would it optimally use? What costs would the firm incur?

(d) If capital were fixed at 27 units in the short run, how much it cost the firm to produce 16 units of output? Why are your answers in parts (c) and (d) different? Explain and illustrate.

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Expert Solution

Rahul Sunny answered 1 year ago

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