Answered step by step
Verified Expert Solution
Question
...
1 Approved Answer
Two firms 1 and 2 are using both capital ( K ) and labour ( L ) to produce identical products. They have different technologies
Two firms 1 and 2 are using both capital (K) and labour (L) to produce identical products. They have different technologies in their productions, which are described as the following production functions:
f1(K1,L1) =aK1+bL1;
f2(K2,L2) =min{aK2,bL2},
wherea,bare two positive constants and the subscripts 1 and 2 represent different firms, respectively. The market prices for capital and labour arerandw.
- What are the minimal total costsTC1andTC2for Firms 1 and 2 when they produceq1andq2amounts, respectively? What are the average costsAC1andAC2, respectively?
- Use suitable analytical tools (either algebraic or graphic) to show that, if the minimal total costs are the same for both firms (i.e.,TC1=TC2), then Firm 1's output levelq1is at least twice of Firm 2's output levelq2, (i.e.,q12q2).
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started