A firms production is represented by the following Cobb-Douglas function: Q = K 1 3 L 2 3. The rental rate, r, of capital is given by $16 and the price of labor is $4. a. For a given level of output, what should be the ratio of capital to labor in order to minimize costs? b. How much capital and labor should be used to produce those 200 units? c. What is the minimum cost of producing 200 units? d. What is the additional cost of increasing output to 350 units in the short run and in the long run? e. Does this production function exhibit increasing, decreasing, or constant returns to scale? Please answer based on the cost calculations in parts c and d
Minimization
In mathematics, traditional optimization problems are typically expressed in terms of minimization. When we talk about minimizing or maximizing a function, we refer to the maximum and minimum possible values of that function. This can be expressed in terms of global or local range. The definition of minimization in the thesaurus is the process of reducing something to a small amount, value, or position. Minimization (noun) is an instance of belittling or disparagement.
Maxima and Minima
The extreme points of a function are the maximum and the minimum points of the function. A maximum is attained when the function takes the maximum value and a minimum is attained when the function takes the minimum value.
Derivatives
A derivative means a change. Geometrically it can be represented as a line with some steepness. Imagine climbing a mountain which is very steep and 500 meters high. Is it easier to climb? Definitely not! Suppose walking on the road for 500 meters. Which one would be easier? Walking on the road would be much easier than climbing a mountain.
Concavity
In calculus, concavity is a descriptor of mathematics that tells about the shape of the graph. It is the parameter that helps to estimate the maximum and minimum value of any of the functions and the concave nature using the graphical method. We use the first derivative test and second derivative test to understand the concave behavior of the function.
II) A firms production is represented by the following Cobb-Douglas function: Q = K
1
3 L
2
3.
The rental rate, r, of capital is given by $16 and the price of labor is $4.
a. For a given level of output, what should be the ratio of capital to labor in order to minimize
costs?
b. How much capital and labor should be used to produce those 200 units?
c. What is the minimum cost of producing 200 units?
d. What is the additional cost of increasing output to 350 units in the short run and in the long
run?
e. Does this production function exhibit increasing, decreasing, or constant returns to scale?
Please answer based on the cost calculations in parts c and d.
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