Question

Asked Aug 2, 2019

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please help

Step 1

Let assume that the cost of capital is r and cost of labor (wages) is w

To obtain maximization condition for any function, it must be differentiated wrt to a variable and set equal to zero.

In the short-run capital is constant, so profit function will be differentiated wrt to L and set equal to zero. Let capital be fixed at k-bar.

Profit function can be written as shown below.

Step 2

To graphically represent the profit maximization, let’s say that the maximum profit is equal to an arbitrary number pie-bar

Step 3

The graph with isoprofit line wil...

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