Question 1

The firm ECON7110 is a consulting firm of microeconomic analysis. Its production function uses labor L (hours of very bright students) and computers K. Computers are very sophisticated, and, hence, L and K are substitutes (though not prefect). Specifically, F(L, K) = L + K where and are two real constants greater than zero. The wage of one student is w and the rental price of each computer is r.

(a) Obtain the cost function C (y, w, r).

(b) Obtain the marginal cost and the average cost function.

Question 2

Suppose now that bright students and sophisticated computers are not substitutes but complements. In particular, suppose that the production function is given by F(L, K) = min {L, K /2}.

(a) Obtain the cost function C (y, w, r).

(b) Obtain the marginal cost and the average cost function.