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7 February, 23:48

Consider a firm with production function f (L, K) = 2L+4K. Assume also that the price of capital r=3 and the price of labor w=2. What is this firm's average cost function when both L and K are variable?

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  1. 7 February, 23:58
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    b) AC (q) = 3/4

    Explanation:

    Since Marginal product of labor (MPL) = 2

    And Marginal product of capital (MPK) = 4

    The price of labor i. e w=2

    And, the price of capital i. e R=3

    That determines

    MPL : W< MPK : R.

    Therefore producer will only use capital and k should be Q : 4 and cost will RK i. e. RQ : 4 = 3Q : 4

    Hence, average cost is

    =TC : Q

    =3/4.

    Here, Q = quantity and TC = total cost
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