Question

6. (10 points) in the last problem set you graphed the isoquants for using coal (L) or wood (K) to produce heat. One unit of coal produces 5 units of heat and one unit of wood produces 2 units of heat. The Isoquants for Q=20 and Q-40 units of heat are shown below. K(wood) 30 20 IZ 10 12 16 L (coal) Q=20 Q=40 $7.50 Suppose that the price of coal is w=16/unit and the price of wood is ve$5/unit. The firm has $60 to spend on heat. a) Write the equation for the isocost line for TC = $60. Graph the isocost line. 60= 7.Sow + Su Sv= 60+ 7,50w 12 +1.5w 2.50-8 = 12 b) How much coal and how much wood should the firm use to maximize the output of heat from an expenditure of $60? Explain. 7.50 2.50 Go - 2,50 (8) = 0 units of wood to maximize the output of heat with $60 the firm should use all the money on coal because at point of using wood the writs of heat decreases any
my answers do not feel right to me

Answer 1

Ans.

A) 7.5 C + 5 v = 60

Coal = 60/ 7.5

= 8

Wood = 60/5

= 12

B)

1units of coal produces 5 units of heat

1 unit of wood produces 2 units of heat

Mrts = Pc / Pv

5/2 > 7.5/5

Hence, to maximise the output, he should use more of coal as coal can produce more heat than wood.