QUESTION ONE Kambule Limited has the following production function: 1/2 Y = 1/100KL Where capital, K, is
Question:
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. [