Question
assume that a firm has convex isoquants, and its production function exhibits decreasing returns to scale (DRS). (10 pts) Draw an isoquant-isocost graph for two
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assume that a firm has convex isoquants, and its production function exhibits decreasing returns to scale (DRS).
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(10 pts) Draw an isoquant-isocost graph for two levels of output (q1=10 and q2=20) for this firm. Denote your cost-minimizing choices of capital and labor as (L1*, K1*) for output q1 and (L2*, K2*) for output q2. Use TC1 and TC2 to denote the total cost of each respective output level.
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(5 pts) How does your graph illustrate DRS? Explain.
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(5 pts) Using the information in part (a), sketch the LR total cost curve for this firm. Does the LR TC curve increase at a constant rate, at a decreasing rate or at an increasing rate?
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