A textile company has the production function Q = min{0.25K, 0.5L}, where K is units of...
A textile company has the production function Q =
min{0.25K, 0.5L}, where K is units of
capital and L is hours of labor.
a. Without
any warning, the price of capital doubles. What should this textile
company do in response?
b. If
this textile company were planning a new plant, would there be any
advantages to a larger facility?
Homework Answers
A)Since the production function is Leontief production function, any increase in price of capital will not change the demand of any input because there is zero substitution effect
B) No because these textile company represent constant return to scale. Thus any increase in plant size or adding a new plant will not work
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