Question

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 100 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 8 units in the short, how much it cost the firm to produce 100 units of output?

Answer 1