Question
Suppose we have the following production function: Q = 10 K + 5L. Confirm the technology is constant returns to scale (CRS). Show your work
Suppose we have the following production function: Q = 10 K + 5L. Confirm the technology is constant returns to scale (CRS). Show your work and explain what it means. (4 points) (b) Suppose K and L are both variable. Let r = $20 and w = $20. What is the firm's cost minimization problem? Show and explain using the isocost and isoquants in a figure. Be sure to show their slopes. (2 points) (c) Now derive the long-run cost function for r = $20 and w = $20. You can use math or a table. (2 points) (d) Confirm that average and marginal costs are constant. Explain why this is the case. (4 points) (e) Now suppose r rises above $20. At what value of r will the firm switch from K into L? Explain and use the isocost/isoquant to explain. (2 points) (f) Show that long-run average costs rise as r rises (but stop rising if r is "very high"). Explain your reasoning. (4 points) (g) What do we mean by an exit price? What is the exit price if r = $15. What is the exit price if r = $60? Explain.
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