Suppose a Firm with a Production Function Given by Q

question 91

Multiple Choice

Suppose a firm with a production function given by Q = K^0.25L^0.75 produces 1,500 units of output. The firm pays a wage of $50 per unit and pays a rental rate of capital of $50 per unit.
(Note:
)
To minimize the cost of producing 1,500 units of output, the firm should use:

• A) 3 times as many units of labor as units of capital.
• B) equal amounts of labor and capital.
• C) 1.25 times as many units of capital as units of labor.
• D) 16 units of capital and 6,814 units of labor.

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Definitions:

Discount Rate

The interest rate charged by central banks for lending money to commercial banks or the rate used in discounted cash flow analysis to determine the present value of future cash flows.

Project Profitability Index

A financial metric that calculates the ratio between the present value of future cash flows and the initial investment of the project.

Profitability Index

A financial metric that measures the relative profitability of an investment, calculated as the present value of future cash flows divided by the initial investment cost.

Investment Projects

Initiatives undertaken by companies or individuals to allocate capital in ways expected to yield returns or gains over time, such as purchasing new equipment or expanding operations.