The per unit price of labor is $10 an hour and the per unit price of capital is $5. The last laborer added 20 units to total output, while the last unit of capital added 40 units to total output.

a.Is the firm using the cost minimizing amounts of labor and capital? In your answer, you should explain using both calculations and words.

b. Suppose this firm increased capital by 1 unit. What would be the change in output? Show your calculations. How much must the firm alter labor by to stay on the same isoquant? Show your calculations. What is the change in total cost of doing these two actions?

c. Do the results in part b make sense given your answer in part a? Explain. What would this look like in a graph? Use the isocost/isoquant graph we used in class to display this. Be sure to label your axes, intercepts for the two isocost lines and isoquant appropriately. You should depict in the graph your original position in part a, call it A, and then a new point representing your actions in part B. What is happening in the graph, to output, to total cost?