Question
A jolly elf runs a toy factory that employs only labor (L) to manufacture toys (Q). The factory has a production function given by Q
A jolly elf runs a toy factory that employs only labor (L) to manufacture toys (Q). The factory has a production function given by Q = (L 1) 1 2 Suppose the cost of labor is w = 1.
Suppose the market demand for toys is given by Q D = 60 P
(d) If the elf is the only producer in the market and acts as a price taker, what will be the short run market equilibrium price and quantity? (Hint: Recall that the supply curve is equal to the marginal cost function where MC>AC.)
(e) Compute the producer and consumer surplus at this equilibrium. (If you didn't find the equilibrium, you can graphically depict these values for partial credit.)
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