Question

Consider the production function Q = LU + 3 LS, where LU is hours of unskilled labor and LS is hours of skilled labor.

a.[2] Does this production function exhibit increasing, constant or decreasing returns to scale? Briefly explain or show how you arrived at your answer.

b.[4] Putting LU on the Y-axis and LS on the x-axis, draw the isoquant that produces exactly 60 units.

c.[4] On the same graph, draw at least one isocost line (including the cost minimizing one) if the price of unskilled labor is $10, the price of skilled labor is $25.

d.[4] What is the cost minimizing bundle of skilled and unskilled labor?

e.[1] Calculate the dollar value of the total cost at the equilibrium.

A firm’s production function is Q = min(3K, 2L).

a.[4] Draw the Isoquant for Q0 =12.

b.[4] If w = 2 & r = 1, draw the cost-minimizing isocost line for Q0 =12 on the same graph as part a.

(Even if you could not graph it, you may be able to figure out the following parts in other ways.)

c.[4] What are the cost minimizing quantities of K and L?

d.[4] If w increases to 3, how do the cost minimizing quantities change? How does total cost change? Briefly explain your answers.

Answer 1