A firm's production function is q= f(K, L) = 7. K¹/2L¹/3. Capital is only available via a long term contract for K = 100 units of capital at a fixed rental rate r. The manager must decide whether or not to enter into such a contract. The firm can sell its output at the price p $84 and pays w = $40 for each unit of labor = employed. a) Suppose r = $250, calculate the profit maximizing use of inputs and the profit maxi- mizing output level. If all these prices stay fixed, is it profitable for this firm to enter into the contract? (Recall that K is fixed at 100 units if the contract is signed. If the contract is not signed you will not operate, i.e. K=0.) b) At the use of inputs calculated part (2a), determine if the rate at which the firm can trade inputs, TRSL,K (K, L) is equal to the rate at which the market can trade inputs -. If they are not equal, explain why if this action is profit maximizing? c) Now suppose r = $300, will this change your answer to part (2a)? Why?

A firm's production function is q= f(K, L) = 7. K¹/2L¹/3. Capital is only available via a long term contract for K = 100 units of capital at a fixed rental rate r. The manager must decide whether or not to enter into such a contract. The firm can sell its output at the price p $84 and pays w = $40 for each unit of labor = employed. a) Suppose r = $250, calculate the profit maximizing use of inputs and the profit maxi- mizing output level. If all these prices stay fixed, is it profitable for this firm to enter into the contract? (Recall that K is fixed at 100 units if the contract is signed. If the contract is not signed you will not operate, i.e. K=0.) b) At the use of inputs calculated part (2a), determine if the rate at which the firm can trade inputs, TRSL,K (K, L) is equal to the rate at which the market can trade inputs -. If they are not equal, explain why if this action is profit maximizing? c) Now suppose r = $300, will this change your answer to part (2a)? Why?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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