Question

Consider a firm with production function f(L,K)=2L+4K. Assume also that the price of capital r=3 and the price of labor w=2. What is this firm’s average cost function when both L and K are variable?

Answer 1

b)AC(q)=3/4

Step-by-step explanation:

Since Marginal product of labor (MPL) =2

And Marginal product of capital (MPK) =4

The price of labor i.e w=2

And, the price of capital i.e R=3

That determines

MPL ÷ W< MPK ÷ R.

Therefore producer will only use capital and k should be Q ÷ 4 and cost will RK i.e. RQ ÷ 4 =3Q ÷4

Hence, average cost is

=TC ÷Q

=3/4.

Here, Q = quantity and TC = total cost