=+13.3†

In this exercise, we add a (long-run) fixed cost to the analysis.

A. Suppose the production process for a firm is homothetic and has decreasing returns to scale.

a. On a graph with labor , on the horizontal and capital k on the vertical axis, draw an isoquant corresponding to output level x. For some wage rate w and rental rate r, indicate the costminimizing input bundle for producing x.

b. Indicate in your graph the slice of the production frontier along which all cost-minimizing input bundles lie for this wage and rental rate.

c. In two separate graphs, draw the (total) cost curve and the average cost curve with the marginal cost curve.