Question 1: Supply [9 Marks; 2, 2, 2, 3] Carmaker produces small cars in a perfectly competitive market using labour (L) and capital (K). Carmaker's production function is given by f(L.K) = min (0.05L, K1/2), where q is the number of cars produced. (a) [2 marks] Starting from L > 0, K > 0, suppose you double the amount of L and K. Is it possible for output (q) to more than double (i.e., increase from q to Aq where A > 2)? (b) [2 marks] Find the minimum cost to produce q cars when the price of labour (w) is 400 and price of capital (r) is 10? [Hint: the answer would involve q.] (c) [2 marks] Using the answer to part (b), we can show that Carmaker's supply function is of the following form: ja + bp for p > AVCmin q = 1 0 for p s AVCmin where AVC stands for average variable cost. Find a, b, and AVCmit (d) [3 marks] A new technology of producing cars has come to the market which only uses capital g(K) = 0.5K1/2 As in part (c), continue to assume w = 400 and r = 10. Carmaker maximizes profits. It uses both technologies and sells q' cars in a perfectly competitive market where the price of small cars is p*. If 1/3 of cars are produced using new technology and 2/3 of the cars with old technology, then P*= q' = How many cars do Carmaker produce in total? What must be the price of cars (assuming that the market for cars is perfectly competitive)