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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

  1. assume that a firm has convex isoquants, and its production function exhibits decreasing returns to scale (DRS).

    1. (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.

    2. (5 pts) How does your graph illustrate DRS? Explain.

    3. (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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