Assume that a firm that manufactures gizmos can produce them with one of three processes used alone or in combination. The following table indicates the amounts of capital and labor required by each of the three processes to produce one gizmo.

a. Assuming capital costs $5 per unit and labor costs $3 per unit, which process will be employed?

b. Plot the three points on the firm’s TVC curve corresponding to q = 25, q = 50, and q = 100.

c. At each of the three output levels, how much K and L will be demanded?

d. Repeat parts a. through c. assuming the price of labor is still $3 per unit and the price of capital has risen to $7 per unit.

Transcribed Image Text:

Process 1. Process 2 Process 3 Units of Labor 5 3 1 Units of Capital 2 236 3