Suppose Cayuga Medical Center (CMC) currently chooses to rent 250 hospital rooms (K) and use 400 workers (L) to produce its output of care to Q1 patients per year. Assume the production function for patient care yields a typically curved isoquant. The rental price of each hospital room (K) for a year is $16,000 and a worker (L) earns $40,000 per year.

a) (10 points) Demonstrate in a graph (using isoquant and iso-cost curves) CMC's choice of K and L that produces Q1. Put L on the horizontal axis and K on the vertical axis. Calculate the total cost to CMC of producing Q1 at these prices and choices of K and L. Also highlight the intercepts and the slope of the iso-cost line. Label both axes and CMC's choice clearly.

b) (10 points) Because of the inflow of new people moving to Ithaca CMC wants to expand and produce Q2, which is greater than Q1. To produce Q2 CMC would optimally choose 350 hospital rooms and 430 workers. What is CMC's total cost of producing Q2? On a new graph, draw CMC's optimal choice of K and L to produce Q2. Similar to part a, compute the value of intercepts and the slope of the iso-cost line.