Answer to Question #165823 in Microeconomics for Varshika Bhardwaj

Question

Suppose that your semiconductor company^’s production function is given by Q = 20KL, where K is capital and L is labor. The price of labor (P_L) is $10 per unit and the price of capital (P_K) is $20 per unit. The marketing department of your company advises you that 1,000 (one thousand) units will be demanded in about five years.

 

(a)   Calculate the optimal size of plant (K) as well as the level of employment (L) for this volume of sale. Also estimate the average cost of production. (note that MP_L = 20K, and MP_K = 20L).

(b)   Now suppose that the marketing department receives new information on the basis of which it revises its estimate of the demand to 2,000 (two thousand) units. Recalculate the optimal combination of K and L necessary for this output level, and re-estimate the average cost of production in the light of this new information.

(c)  How would you explain the change in the cost per unit as calculated in parts (a) and (b)?

      

(d) If due to some technicality, the firm is unable to expand its plant over the next five years; will the engineering department still be able to meet this new volume of demand in any alternative way? How? How much extra cost will be involved?

Answer 1

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