Suppose a firm has a Cobb Douglas production function and is initially producing 50 units of output using a long-run cost minimizing combination of inputs. The firm increases its output to 100 units. In the short run its level of capital remains fixed at the initial level (but the amount of labor used can be changed). In the long run, both inputs can change. On a graph, with amount of labor on one axis and amount of capital on the other, illustrate the expansion path in the long run and the short run. Draw an isocost line and an isoquant through each of the three solutions (i.e. before the increase in output, in the short run after the increase in output and in the long run after the increase in output. Note that both the second and third will be on the same isoquant). Your diagram does not need to be to scale, but should indicate the correct shapes and relative positions of the curves/lines.
Suppose a firm has a Cobb Douglas production function and is initially producing 50 units of output using a long-run cost minimizing combination of inputs. The firm increases its output to 100 units. In the short run its level of capital remains fixed at the initial level (but the amount of labor used can be changed). In the long run, both inputs can change. On a graph, with amount of labor on one axis and amount of capital on the other, illustrate the expansion path in the long run and the short run. Draw an isocost line and an isoquant through each of the three solutions (i.e. before the increase in output, in the short run after the increase in output and in the long run after the increase in output. Note that both the second and third will be on the same isoquant). Your diagram does not need to be to scale, but should indicate the correct shapes and relative positions of the curves/lines.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Suppose a firm has a Cobb Douglas production function and is initially producing 50 units of
output using a long-run cost minimizing combination of inputs. The firm increases its output to
100 units. In the short run its level of capital remains fixed at the initial level (but the amount of
labor used can be changed). In the long run, both inputs can change.
On a graph, with amount of labor on one axis and amount of capital on the other, illustrate the
expansion path in the long run and the short run. Draw an isocost line and an isoquant through
each of the three solutions (i.e. before the increase in output, in the short run after the increase
in output and in the long run after the increase in output. Note that both the second and third
will be on the same isoquant). Your diagram does not need to be to scale, but should indicate
the correct shapes and relative positions of the curves/lines.
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