ECO 100 Workbook Summer 2014 Problem 2

| November 24, 2016

A firm that is operating with production function q = K0.25L0.25 has mrts = K/L and hires labour for w = 1.00 and capital for r = 0.25.

a) Construct an Isoquant Diagram to illustrate how this cost minimizing firm would produce q = 2 units of output as bundle “a”, how the firm would implement a short-run increase in output to q = 4 units when capital is fixed at the level chosen for q = 2 as bundle “b” and how this firm would implement a long-run increase in output to q = 4 when capital in not fixed as bundle “c”
b) Provide a Total Cost Curve Diagram to sketch the long-run total cost C = C(q, w, r) and short-run total cost SC = SC(q, K, w, v) curves at q = 0, q = 2, and q = 4.
c) Underneath the total cost curve diagram provide and Average Cost Curve Diagram to sketch the long-run AC curve and the short-run SATC, SAVC and SAFC curves at q = 0, q = 2, and q = 4.

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