Answer on Microeconomics Question for Anthony
a. Explain the cost minimization rule for this firm and why this rule is logical…
b. Suppose that the firm hires 100 units of capital and 500 units of labour and
that the MPl is 20 while MPk is 25. If a unit of labour costs $4.00 and a unit of
capital costs $5.00, is the firm minimizing costs? Explain.
c. If the price of capital falls to $4.00 what should the firm do to minimize cost?
Explain why your answer is consistent with the cost minimization rule.
b. K = 100 units, L = 500 units, MPl = 20, MPk = 25, w = $4.00, r = $5.00.
If the firm is minimizing costs, MPl/w = MPk/r, and in our case:
20/4 = 25/5 = 5, so the firm is minimizing costs.
c. If the price of capital falls to $4.00, the firm should increase the use of capital and decrease the use of labor to minimize cost.
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