producing 20 units of output with 0 units ot labor and S unts of s as noted in 1

Question

producing 20 units of output with 0 units ot labor and S unts of s as noted in 10. Suppose you are hired as a new manager of a firm TS i capital. Assume the price of labor is $100 and the price of capital is Table 1. $100 Along the isoquant, the MR Table 1 Between MRTS points a and b b and c c and d d and e 500 750 1.00 -Q-20 10 L. Given the above graph and table a. In detail, explain the optimizing decisions for minimize cost (Hint: think about the MC and MB of changing L) Whin mRTSW/R100/1001 b. To minimize cost, you should use laborers and units of capital. (It is possible to hire non- integer units of capital) c. How much total cost will you be able to save by changing the input combination? nitial cost-1o 100+ 5 X100

Explanation / Answer

ans a.

cost is minimized at the point where MRTS = W/R = 100/100 = 1

and MRTS = 1 between point d and e

ans b.

at the point where cost is minimized , labours = 8 and capital = somwhere between 6 and 8 (exact unit I am not able to find as the markings of Y axis are not mentioned in the graph.)

ans c.

cost earlier = cost of labour + cost of capital = $100 * 10 + $100 * 5 = $1500

cost now = $100 * 8 + $100 *6= $1400

= $100 * 8 + $100 * 8 = $1600

so, we are able to save maximum of atleast $100 ( $1500- $1400)

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