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A firm has a production function Q=4KL, MP1 = 4K and MPx = 4L. (1) Does this production function exhibit increasing, decreasing or constant returns
A firm has a production function Q=4KL, MP1 = 4K and MPx = 4L. (1) Does this production function exhibit increasing, decreasing or constant returns to scale? Explain. (2) Suppose that the price of labour and capital are given by w and r. Solve for the quantities of L and K that minimize the cost of producing Q units of output. (3) Provide an expression for the long run total cost function. (4) Now suppose w=r=25. Write out the expression for the long run total cost curve and plot it on a graph. (5) With w=r=25, derive the long run average cost curve and plot it on a graph. Does this firm experience economies or diseconomies of scale? Explain. (6) Suppose that w and r each increase to 30. How will the cost minimizing L and K to produce a certain level of output change? Explain. How will the long run average cost curves change
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