Suppose that the MPl = 50 and the per unit price of labor is 25. The MPk = 100 and the per unit price of capital is 25.

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A. Is this firm minimizing the cost of producing a given level of output? Explain your answer using numbers from above.

B. If the firm is not minimizing the cost of producing the given amount of output, what should this firm do?

C. If the above firm increased capital by one unit, how much would the firm need to reduce labor by in order to keep output constant? What would happen to total cost?

D. Depict an initial K,L combination consistent with your MPl/MPk and w/r above. Hint: Draw your isoquant/isocost graph from the cost minimization model. You must have two isocost lines and a single isoquant. Show what the firm would need to do graphically in order to move from this initial point to the point where the MRTS = w/r. Label all relevant points and describe what is happening in the graph to labor, capital and total cost.

Suppose that a price setting firm has the following direct demand function:

Qd = 100-20P.

Find the inverse demand curve.

Find the equation for TR where TR is a function of Q.

Find the equation for Marginal Revenue, where MR is a function of Q.