Question 1. An electronics plant's production function is Q = 8LK, where Q is its output, L is the amount of labor it uses per period, and K is the amount of capital it uses per period. The price of labor is $10 per unit of labor, and the price of capital is $25 per unit of capital. The firm's vice president for manufacturing hires you to determine which optimal combination of inputs the plant should use to produce 80 units of output per period.

a. What advice would you give him? [5 marks]

b. Suppose the price of labor increases to $15 per unit. What effect will this have on output per unit of labor? [7 marks]

c. Is this plant subject to decreasing returns to scale? Why or why not? [3 marks]