QUESTION ONE

Kambule Limited has the following production function:

1/2

Y = 1/100KL

Where capital, K, is measured in machine-hours, labor, L, is measured in person-hours, and Y denotes the yearly output. The hourly wage rate WL = 10, and the hourly rental rate of capital is WK = 20.

Show that this technology displays increasing returns to scale. [5 Marks]

Compute the marginal products of labor and capital. [5 Marks]

Suppose that at the end of 1999 the firm has signed a contract to rent K = 1,000 machine hours over the course of the year 2000. Derive the firm's short run cost function in the year 2000. [5 Marks]

What is the firm's short run marginal cost function? What is the firm's short run average cost function? At which point do these two curves intersect? [5 Marks]

On a diagram plot the firm's short run average and marginal cost curves. [