2. A firm has the following production function: q = 4L + K (1)

a) How would you characterize this production function, i.e., how do the inputs relate to each other?

b) What are the returns to scale of this production function? b) Use a carefully drawn and labeled graph to depict this firms isoquants for q1 = 4, q2 = 8 and q3 = 12.

c) What will be the optimal input bundles for q = 8 given the following input price combinations: w = $1, r = $1 (2) w = $5, r = $1 (3) w = $8, r = $2 (4)

d) State the conditions under which labor will be used over capital, and vice versa.

3. A firm is producing q = 345 with the cost minimizing input bundle L = 23, K = 15 when w = $5 and r = $10.

a) In this situation which is greater: MP L or MPK?

b) Use a carefully drawn and labeled graph (isoquants and isocost lines) to depict the outcome if when the cost of labor increases from $5 to $8, the optimal input bundle changes to L = 18, K = 19.