1. Suppose that firm’s technology is given by the following production function: Q(K,L)= L1/2K1/2 The prices of inputs are w = 2 and r = 2. a) Does this production function exhibit increasing, decreasing or constant returns to scale? Prove your answer. b) Derive the equation of firm’s long-run total cost curve (TC(y)), the long-run average cost curve (AC(y)), and the long-run marginal cost curve (MC(y)).

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Isocost and Isoprofit Curve Analysis

An isocost curve in the production theory that is a crucial part of economics depicts different combinations of factor inputs at a given market cost. In other words, this shows all the combinations of production factors that cost the same for the firm to employ. Usually, this can be depicted as a downward sloping straight line when the firms act as the price-takers in the factor markets. The slope of this mainly depicts the relative prices of different production factors.