Question

SK Electronics in Korea is planning to move its production to a plant in Vietnam. Its estimated production function is q=L⁰ˑ⁵ KL⁰ˑ⁵.

In Korea, factor prices are w = r =10. In Vietnam, the wage is half that in Korea, but the firm faces the same cost of capital: w*= 5 and r*= 10. Their research department estimates the market quantity demanded as 100.

In both countries, what are L and K, and what would be the total cost of production to meet the market demand?

Answer 1

In the given scenario, SK Electronics is planning to move its production from Korea to Vietnam. The production function is q = L⁰ˑ⁵ K⁰ˑ⁵. The total cost of production to meet the market demand can be calculated by multiplying the factors of production with their prices and summing them up.

Step-by-step explanation:

In the given scenario, the production function is q = L⁰ˑ⁵ K⁰ˑ⁵, where q represents the quantity produced, L represents labor, and K represents capital. The firm is planning to move its production from Korea to Vietnam. In Korea, the factor prices are w = r = 10, whereas in Vietnam, the wage is half of that in Korea (w* = 5), but the cost of capital remains the same (r* = 10).

To determine the values of L and K, we need additional information like the quantity demanded and the market price. However, we are given the quantity demanded as 100. With this information, we can calculate the values of L and K using the production function and the given wage rates.

Once we have the values of L and K, we can calculate the total cost of production to meet the market demand by multiplying the respective factors of production with their prices and summing them up.