A Firm Produces Steel Plates Using a Production Process That

question 66

Essay

A firm produces steel plates using a production process that can be described by the function: q = (KL)^1/2.
i)How much output will the firm produce if it uses 1000 units of capital and 250 units of labour?
ii)If capital costs 25 per unit and labour costs 50 per unit, is the firm minimizing the long run costs when it uses 1000 units of capital and 250 units of labour?
iii)The national government wants to encourage companies to adopt new technologies. To that end, they offer tax credits for the purchase of new capital equipment, which effectively reduces the price of new capital. The credit applies only to additions to the firm's current capital stock. Show on a graph and explain what happens to the isocost line and the amounts of capital and labour the firm uses if they continue to produce the same level of output as before. You may assume the firm was previously in long run equilibrium.

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