QUESTION 5: (LONG RUN COSTS) (25 pts)

An auto manufacturer in India is considering moving its production to a plant in Vietnam. Its estimated production function is q =20.50.52L0.5K0.5. The factor prices in India are w = 300 and r = 1200. In Vietnam, the wage is 20% less, but the firm faces the same cost of capital, ie: w* = 240 and r* = r = 1,200. What is the cost minimizing combination of capital and labor (K and L) in both countries if the desired level of output is q = 20 units?

Illustrate the isoquant and isocost curves if production takes place in India and in Vietnam.

QUESTION 6:(LONG RUN COSTS) (15 pts)

Now suppose that in an effort to incentivize investment in India, the Indian government decides to subsidize wages at a rate of 25%, ie: the Indian government is now paying 25% of wages. What effect will this have on the cost minimizing combination of capital and labor in India? (You can again assume that the desired level of output is 20 units).

Illustrate the new situation in India by using isocost and isoquant curves after the subsidy.