Question
Consider a firm that seeks to minimize the cost of producing a given level of output q. The firm's production function is given by: q
Consider a firm that seeks to minimize the cost of producing a given level of output q. The firm's production function is given by: q = min{2k, n} where k denotes the level of capital and n denotes the number of workers used in production. If the firm wants to produce q = 100 units, find the quantity of labor would it hire given that the price of labor is w = $10 and the price of capital is r = $5. (Hint: the corner of the isoquant can by found by setting q = 2k = n). Suppose that the price of labor decreases to w = $5, estimate both the substitution and scale effect if the firm continues to spend the same funds. Depict all the optimal points on a graph
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