Suppose we now care about the long run decisions of a firm that has a production function of the form q = 2L + 3K
Now suppose instead that the price of each unit of labor is 3 and the price of each unit of capital is 4. Firm’s output is still 20. Find the optimal choices of labor and capital. Show all your steps. Draw the optimization problem and locate the optimal choice in the graph.
1. If the price of each unit of labor is 4, the price of each unit of capital is 5 and the firm decides to produce 20 units of output, find the optimal choices of labor and capital.
2. Can you find the price ratio (that is w/r) at which the optimal bundle changes? Justify your answer.