Answer to Question #16195 in Microeconomics for Farooq b

Question #16195

Consider a firm with a production function, Y=L0.5K0.5, where Y is output, K is units of capital and L is number of workers.
a) Plot the isoquant associated with 100 units of output.
b) Explain why the isoquant from a) does not touch either of the axes of your graph.
c) Assume that the firm is required to produce 100 units of output, the market wage rate is 2 and the rental rate of a unit of capital is 0.5. Show graphically the cost minimizing production combination of capital and labour in this case.
d) Show graphically the impact on the optimal choices of L and K in c) if a binding minimum wage was introduced raising the wage from 2 to 3.

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