A.) A chair manufacturer hires its assembly-line labor for $30 an hour and calculates that the rental cost of its machinery is $15 per hour. Suppose that a chair can be produced using 4 hours of labor or machinery in any combination. (Hint, what does this previous sentence mean about the isoquant?) If the firm is currently using 3 hours of labor for each hour of machine time, is it minimizing its costs of production? If so, why? If not, how can it improve the situation? Graphically illustrate the isoquant and the two isocost lines for the current combination of labor and capital and for the optimal combination of labor and capital.

B.) Suppose a firm's short run cost function is: C = 16q^3 8q^2 + 15q + 4000.

What is the equation for marginal cost? What is the equation for average variable cost? At what output is the minimum AVC?

Suppose the economy takes a downturn, and that labor costs fall by 50 percent and are expected to stay at that level for a long time. Show graphically how this change in the relative price of labor and capital affects the firm's expansion path.