Q1. (18 points) A firm has carefully estimated its production function to be one of the scenarios

below where Q = units of output, K = units of capital, and L = units of labor. If both capital and

labor were increases by 10%, how much would output increase (in percentage terms)? What sort of returns to scale does the firm face? Explain.

1. Q = K^0.2 L^0.4
2. Q = 4K + 2L
3. Q = KL-K^2- L^2

Q2. Adam and Jax are looking to start a lawncare business over the summer. They've estimated to spend $4,000 to rent equipment and $200 for insurance. In addition, they've also estimated $4 per yard for gas and oil. Based on previous demand, they expect to get $40 per yard. If they decide to not open this business, they could work on a local farm for the summer earning $3,000.

1. (3 points) What is their opportunity cost if they decide to operate this business?
2. (5 points) Set up the accounting profit equation.
3. (5 points) Set up the economic profit equation.
4. (5 points) How many customers/lawns will they need to break-even? (Hint: set economic profit to 0)