Suppose that widgets can be produced using the two different production techniques A and B on a daily basis. The following table provides the total input requirements for each of the five different total output levels.
Q= 10 Q= 20 Q= 30 Q= 40 Q= 50
Tech K L K L K L K L K L
A 3 3 2 6 3 9 4 12 6 24
B 4 2 8 3 12 4 16 4 20 6
a. Assume the price of labor (Pl) is $100 per day and the price of capital (Pk) is $50 per day. Calculate the total cost of production for each of the five levels of output using the optimal (least cost) technology at each level.
b. How many units of labor would be employed at each level of output? How much capital?
c. Graph the total cost of production as a function of output. (Put total cost on the Y-axis and output on the X-axis)
d. Repeat 1-3 under the assumption that the price of labor is $50 per day and the price of capital is $100 per day.
e. If labor is relatively more expensive than capital, which production technique will be used? How does this example relate to the U.S. economy?