The economy is populated by two firms. One firm produces cars (c), the other produces beans (b). The production function of each firm i = {c,b} is Y; = KL Cars are capital intensive, hence ce > os. The price of cars is pe and the price of beans is p. Firms take all prices as given. The unit cost of labor is w and the unit cost of capital is r. The total amount of labor and capital in the economy are, respectively, L and K. 1. Write down the optimality condition for capital and labor of each firm 2. Derive the capital-to-labor ratio of each firm

The economy is populated by two firms. One firm produces cars (c), the other produces beans (b). The production function of each firm i = {c,b} is Y; = KL Cars are capital intensive, hence ce > os. The price of cars is pe and the price of beans is p. Firms take all prices as given. The unit cost of labor is w and the unit cost of capital is r. The total amount of labor and capital in the economy are, respectively, L and K. 1. Write down the optimality condition for capital and labor of each firm 2. Derive the capital-to-labor ratio of each firm

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter10: Cost Functions

Section: Chapter Questions

Problem 10.4P

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3.
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We expect the marginal cost to increase as this firm produces more computers. But when the firm shifts from producing 1 to 2 computers, marginal cost falls. What might explain this?
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