1. (10 points)

(a) An electronic firm's production function is Q = 5LK, where Q = output, L is the amount of labor it uses per period, and K is the amount of capital it uses per period. The price of labor is $1 per unit of labor, and the price of capital is $2 per unit of capital.

Marginal product of labor is 5K

Marginal product of capital is 5L

If the firm wants to produce 20 units of output and does so with 2 units of labor and 2 units of capital, is it using the cost minimizing quantity of labor and capital? If not, what should it do (more labor and less capital or more capital and less labor)? You may assume that fractional quantities of labor and capital are available and can be used (for example the firm can hire 1.5 workers or 2.4 units of capital). Please explain and show all calculations.

(b)

Total Cost Total Total Average Average Marginal Output Fixed Cost Variable Variable Total Cost Cost Cost Cost 260 m- __ - ___ 0.50 __ _500 _