Question

Cheburashka uses kiwi fruits (K) and labour (L) to produce juice (q). His production function 1S: where labour is measured in hours, kiwi fruits in kg, and juice in (large) bottles. For example, if he uses 1 kg of kiwi fruits and 3 hours of labour, he can produce 1 bottle of juice a) Draw isoquants for q, q 2 and q 3 on a diagram with labour on horizontal axis and kiwi fruits on vertical b) Let the price of labour-hour be given by w $15 and the price for each kg of fruit be given by p - $7. What is the optimal amount of labour and fruit to use to produce q bottles of juice, if Cheburashka strives to minimise costs? Ilustrate on the diagram from a) by drawing corresponding isocost lines. c) Draw the Cheburaska's expansion path on a diagram from a). Derive an expression for the expansion path, i.e. K as a function of L. How does it depend on the wage and the price of kiwi? d) What is Cheburashka's long-run total cost function, C(q)? Sketch it on a diagram e) One of Cheburashka's advisers, Madam Shapoklyak, suggests that if wage keeps increasing as predicted, he should start hiring less labour and use more kiwi fruits instead, in order to minimise his costs. Briefly evaluate the quality of her advice. (If you agree with her advice, explain why; if you disagree with it, please explain why and suggest an alternative.)

Answer 1