Profit Maximization Orientation of a Firm: The Price and Quantity Determination

QUESTION 1

Given the production function of a firm as Q = 10K^1.6 L^1.2. With Q is the quantity of output, K is capital and L is labour. Capital input price is RM30 per unit and wage is RM20 for each labour. The firm is currently using 80 units of capital and 50 units of labour.

a) Determine the total quantity produced using the efficient input mix.(7 marks)

b) Quantify the production function return to scale and interpret it. (3 marks)

QUESTION 2

The estimated demand function of king fnd ice-cream is P = 80 - 2Q and the estimated cost function of the ice-cream is TC = 100 + 40Q - 1.5Q² + 0.2Q³.

a) Estimate the maximum profit earned by the king fnd ice-cream producer. (6 marks)

b) Can the king fnd ice-cream producer maintain the profit in the long run if the producer is operating in a monopolistic competitive industry? Justify your answer.(4 marks)