Question: Suppose a market with the following production function F(K, L) = (K - 1) 1 4L 1 4 . Consider the wage w = 1 and the capital return r = 4. Suppose in the short run K = 2.
a) What is the demand for labor in the short run?
b) Calculate the cost function, marginal costs and average costs.
c) write the supply function. Consider the possible close of the firm in the short run. Draw a graph with your results.
d) Let analyze the long run case. Calculate the MRTS. Explain what it represents.
e) Calculate the demand for both production factors.
f) Calculate the cost function and average costs. What type of scale economies does it have?