A business owns two factories: q=sqrt(KL) for both factories r=w=1 In short run, K1=25 K2=100 Question: 1) In order to minimize production cost, how should the business allocate production between the two factories? You must explain clearly. ( For example if you believe the short run marginal cost should equal, explain why). 2) Under perfect allocation, derive SRTC, SRMC, SRAC. 3) How should the business allocate production in long run? Derive LRTC, LRMC, LRAC (Hint: Lagrangian menthod) 4) If both factories exhibits decreasing returns to scale, explain why the optimal allocation in long run is letting the MC of last unit produced equal.

A business owns two factories: q=sqrt(KL) for both factories r=w=1 In short run, K1=25 K2=100 Question: 1) In order to minimize production cost, how should the business allocate production between the two factories? You must explain clearly. ( For example if you believe the short run marginal cost should equal, explain why). 2) Under perfect allocation, derive SRTC, SRMC, SRAC. 3) How should the business allocate production in long run? Derive LRTC, LRMC, LRAC (Hint: Lagrangian menthod) 4) If both factories exhibits decreasing returns to scale, explain why the optimal allocation in long run is letting the MC of last unit produced equal.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter16: Labor Markets

Section: Chapter Questions

Problem 16.7P

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