ECO 1305 Lecture Notes - Lecture 26: Production Function, Perfect Competition, Marginal Cost

Assume a firm is currently employing 20 units of capital and 100 units of labour in its production process. Assume also that the marginal product of the 20th unit of capital is 40 units of output, the marginal product of the 100th unit of labour is 10 units of output and the per-unit prices of capital and labour are $20 and $10, respectively. In this case, to minimize its costs of production the firm should:

1. hire more capital and less labour.
2. hire more labour and less capital.
3. hire less capital and less labour.
4. hire more capital and more labour.

Consider a firm for which production depends on two normal inputs, labour and capital, that are not perfect complements. Initially, the firm faces market prices of w = 10 and r = 8, for labour and capital. These prices then shift to w=7 andr=7.

a) In which direction will the substitution effect change the firm's employment and capital stock?

b) In which direction will the scale effect change the firm's employment and capital stock?

c) Can we say conclusively whether the firm will use more or less labour? More or less capital?

A firm has a production function Q=F(K, L) with the constant return to scale, where k is units of capital and L is united of labour. Input prices are r=$2 per unit of K and w=$1 per unit of L. When it produces 5 units of output, it uses 2 units of capital and 3 units of labour. When its long-run total cost is equal to $70, how much capital and labour it will employ to product how many units of output? What is the long-run average cost?