Question

5. (20 points) An entrepreneur purchases two factories to produce frisbees. Each factory produces identical products, and each has a production function given by: he factories differ, however, in the amount of capital equipment each has. Factory 1 has K1-25 and factory 2 has K2 -100. The wage rate and the rental rate for capital are givern If the entrepreneur wishes to minimize short-run total costs of frisbee production, how should output be allocated between the two factories? Please explain your answer and show your results. Hint: Find SR costs for each factory and then minimize total firm costs subject to the constraint that the combined output of the two factories adds up to total firm output. a. b. Assuming that output is optimally allocated between the two factories, calculate the short-run total, average, and marginal cost curves. What is the marginal cost of the 100th frisbee? The 125th frisbee? The 200th frisbee? How should the entrepreneur allocate frisbee production between the two factories in the long run? Please explain your answer. Calculate the long-run total, average, and marginal cost curves for frisbee production How would your answer change if both factories exhibited decreasing returns to scale? Please explain vour answer. c. d.

Answer 1

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